Takeover of Washington Mutual offers much to gain, little to lose

JPMorgan takes calculated risk

WASHINGTON — The government's seizure and sale of Washington Mutual Inc. ease pressure on a federal fund that insures Americans' bank deposits and places a high-stakes opportunity — with minimal risk — into the hands of JPMorgan Chase & Co. Inc.

The chief executive of WaMu is entitled to more than $13 million in severance and bonus pay. U.S. taxpayers, meanwhile, could end up shouldering billions of dollars worth of shaky mortgages and other investments that contributed to WaMu's demise. Such a scenario assumes the massive bailout proposed by Treasury Secretary Henry Paulson, or something like it, will be approved and JPMorgan will sell WaMu's least desirable assets to the government.

For its $1.9 billion investment, JPMorgan gets control of the nation's largest thrift — more than 5,000 branches in 23 states. It also assumes a highly stressed loan portfolio that could result in a $31 billion write-down.

While JPMorgan would be in a position to limit such a hit by taking advantage of a Paulson-like bailout plan, analysts said, the bank is strong enough — it had $98.7 billion in capital at the end of the second quarter — to shoulder the write-down on its own.

"I don't think they need the government bailout to make WaMu work," said Len Blum, managing director of Westwood Capital. "They have the capital, they have the strength to hold those assets and take the write-down."

Blum expects the bank to benefit from the bailout in a more indirect way — as strong banks will prosper in a more stable market environment.

During a conference call with investors Thursday night, JPMorgan Chief Executive Jamie Dimon said the government's proposed bailout plan wasn't a factor in the acquisition.

Some experts said that's just not plausible.

Jim Wilcox, a finance professor at the University of California Berkeley's Haas School of Business, said he believes JPMorgan based its acquisition of WaMu on the assumption that a Paulson-like bailout plan would pass.

Bart Narter, senior vice president of banking at Boston-based research and consulting firm Celent, said JPMorgan made a calculated risk.

"They did a little decision tree on whether the bailout will happen and how bad the situation will get and the bargain they got on the branch network, and they figured they'd pay a risk-adjusted cost for the assets they're taking," including the branches and mortgage-backed securities, he said.

In a booming vote of confidence in JPMorgan's action, investors bought 246.9 million new shares Friday at $40.50 apiece, a 7 percent discount to Thursday's closing price of $43.46. JPMorgan raised gross proceeds of $10 billion from the offering, well above the $8 billion it had originally planned to raise.

Ultimately, though, JPMorgan has taken a gamble.

There is still a risk that the bank will be forced to write down more than $31 billion on the troubled assets it acquired, said Donn Vickrey, co-founder of Gradient Analytics. "But I just think it's a gamble worth taking and they have the capital to handle it if it does become worse," he said.

Washington Mutual's lucrative deposits outweigh any risk due to the write-down, Vickrey said. And, in the end, if the bank actually ends up making a little money on the loans, that's just a bonus, he said.

For the Federal Deposit Insurance Corp., the near-term financial threat posed by WaMu's failure drove the agency to expedite a seizure and sale.

"It was unique in its size and exposure to higher-risk mortgages and the distressed housing market," Sheila Bair, the chairman of the FDIC, said in a conference call Thursday. "This is the big one that everybody was worried about."

FDIC's primary objective in organizing an auction that included JPMorgan and three other financial institutions was to dissolve WaMu without any cost to the deposit insurance fund, or to taxpayers.

Before the deal with JPMorgan was brokered, there was concern on Wall Street that FDIC might have to tap the Treasury Department for a short-term loan.

The insurance fund, which depends on premiums paid by U.S. banks and thrifts, is currently at around $45.2 billion — below the minimum target level set by Congress. The fund took an $8.9 billion hit from the collapse of Pasadena, Calif.-based IndyMac, which had $32 billion in assets, and some analysts had estimated that a failure of WaMu could cost the insurance fund tens of billions of dollars.

The size of the insurance fund is still a concern, however. Thirteen federally insured banks and thrifts have succumbed so far this year, and more are expected to fail as the mortgage crisis continues to reverberate across the industry.

Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund.

JPMorgan's rescue of WaMu on Thursday was the second time in six months that it has taken over a major financial institution crippled by bad bets in the mortgage market. In March, it was Bear Stearns Cos. that was in trouble. JPMorgan paid $2.3 billion for the company and its stock — and the Federal Reserve helped grease the deal by providing a $29 billion loan.

A seizure of WaMu had been widely anticipated for some time because of the company's heavy mortgage-related losses. It has seen its stock price plummet 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday.

JPMorgan Chase said it plans to close less than 10 percent of the two companies' branches; the bank has not decided which to close.

WaMu CEO Alan H. Fishman signed an agreement when he joined the company earlier this month that provides around $6 million in cash severance and retention of his signing bonus of $7.5 million if he were to leave his job.

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Bankruptcy filing doesn't always mean a fresh start

As the economy continues to struggle, one indicator keeps rising nearly every month — bankruptcy filings.

Job losses, medical payments and other pressures have pushed a rising number of Americans to the courts in search of protection from creditors, with bankruptcy filings up 29 percent so far this year.

Yet bankruptcy isn't a magical solution for many debt-burdened people. It won't give everyone the clean financial slate they envisioned.

For one thing, bankruptcy eligibility rules are tighter today than in years past. In particular, Chapter 7 filings, which generally provide a fresh financial start, are basically limited to people with moderate incomes.

Chapter 13 filings, which allow debtors to arrange a repayment plan, come with restrictions of their own. Nearly all consumer filings are either Chapter 7 or 13 cases.

In addition, not all types of debts can be discharged in bankruptcy proceedings.

Steven Kaminski learned that the hard way. The 39-year-old Phoenix resident filed for bankruptcy several years ago but wasn't able to wipe the slate clean on his education loans. Student debts along with child support, alimony and past-due income taxes aren't easy to eliminate.

Kaminski had accumulated about $36,000 in loans upon earning his bachelor's degree in business about a decade ago.

But because of lingering medical expenses, other bills, bouts of unemployment and a modest-paying job, he hasn't paid off those obligations.

To the contrary, Kaminski said mounting interest payments have pushed his student-loan burden to nearly $100,000.

"I'm very bitter about the whole thing," he said. "If I could just get rid of the interest, I'd think that would be a win."

Bankruptcy filers used to be able to get out from under student loans, but Congress tightened the rules decades ago amid reports of abuses.

Specifically, students taking out big loans to fund a law, business, medical or other professional degree sometimes would discharge the debts in bankruptcy court, then turn around and start high-paying careers, said Don Gaffney, a partner at Snell & Wilmer in Phoenix.

Today, education debts, including loans not guaranteed by the government, can be discharged only when bankruptcy filers can show hardship — and that's not easy.

"You would pretty much need to be working at the poverty level through no choice of your own," said Tempe, Ariz., attorney Joe Volin.

You might get out from under an education debt if you didn't borrow the money specifically for educational purposes.

"You'd need to prove you can't pay now and never will be able to pay," said Gilbert, Ariz., attorney Chris Dutkiewicz.

"If you paid all your tuition on a credit card, you might be able to discharge it," Dutkiewicz said.

Child support and alimony are other types of personal debts that usually stay in place despite a bankruptcy filing.

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Southeast can't shake gas shortage

RALEIGH, N.C. — This is how serious the Southeastern gas shortage has become: There's talk of calling off college football.

Not serious talk, of course. A petroleum executive's suggestion that No. 3 Georgia postpone its Saturday night game against No. 8 Alabama was quickly dismissed Friday by the Georgia governor's office as "ridiculous."

But the university's police chief did suggest fans who can't make a round trip to Sanford Stadium on a single tank stay home.

Two weeks after Hurricane Ike shut down Gulf Coast refineries and dried up interstate pipelines, some panicked drivers are still waiting in long lines to top off their tanks at the few stations in their area with fuel.

Many across the Southeast are keeping their cars in the garage this weekend, forced to cancel plans for fear they'll run out of gas.

"I don't have any assurance that I'm gonna even be able to get more than $30 worth of gas," said Wendy Stewart, 37, a bank manager from Atlanta who had planned to drive to Charlotte. "How am I gonna get out of town and drive five hours on $30 of gas? I can't do it."

Brittany Hoisington, 19, a veterinary assistant from Raleigh, decided weeks ago to travel to Asheville with her grandfather to visit her uncle. She hasn't seen her uncle in five years, and now the reunion will have to wait.

"I figure it might not be a good idea to go there if there's no way to get gas," Hoisington said. "How would we get home?"

The gas shortage has hit hardest in Atlanta, Nashville and the Carolinas, including the Charlotte area and the mountain towns to the west. For days it has closed civic offices, cut short workdays and even canceled community college classes.

Despite promises that more fuel may have already arrived, the shortage appears likely to continue to intrude on personal time, threatening college football homecomings, spins through the mountains to check out fall foliage, and a last warm-weather weekend at the beach.

"People have called saying, 'If I get there, can I get back?' " said Brad Dean, Chamber of Commerce president in Myrtle Beach, S.C., where gas is plentiful.

Worried drivers have jammed the phone lines all week at the Florida offices of AAA Auto Club South to ask if they should cancel plans. Those who can't, said spokesman Randy Bly, should budget extra time to search for gas and start hunting when their fuel gauge starts to drop.

"What I tell people is if I had the option, I would not go anywhere this weekend," Bly said.

Ironically, those warnings are exacerbating the shortage. Tom Crosby, a spokesman for AAA Carolinas, said more than two-thirds of the Gulf Coast oil refineries shut down by Ike are back online. Fuel is again flowing in the pipelines that serve the hardest-hit areas, he said, but not enough to account for folks rushing to top off their tanks when an empty station is resupplied.

"It's like ants to a picnic and they feed until it's all gone," Crosby said.

He and state officials said supply issues in western North Carolina should subside by today.

Even in places that have gas, cost is still a concern. Mandy Roberts, of Pleasant View, Tenn., had planned to drive with her husband and 9-year-old son to Tuscaloosa, Ala., next weekend to watch Alabama host Kentucky. But they sold their tickets, unable to afford the drive.

"I'm disappointed. This would have been my son's first game," said Roberts, 29. "He's starting to take an interest, and it would have been neat for him to see it in person. Maybe next year."

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Banks may call back risky loans, even from good customers

The impact of the financial crisis of the past couple of weeks has created lots of hyperbole.

With the quasi-nationalization of parts of the financial industry (and the auto industry may not be far behind, by the way) we have become the United States of France, according to an essay published at Time.com.

A caller to a local radio show one morning said we've become the USSA — the United Socialist States of America.

But what does all this mean for the millions of entrepreneurs across Middle Tennessee? How might the current financial crisis and the remedies being put in place in Washington affect small business in Nashville and other cities across the country?

First, credit will be much harder to get, says Mike Diegel of the National Federation of Independent Business, a small business lobby.

"There is less for the Wall Street banks to lend to each other, and likely a little less for community banks to lend out," he said. But debt is the last thing any entrepreneur needs more of right now. So, a tightening of credit may not be as big an issue as it seems on the surface.

Also, credit will be much harder to keep. As I have warned for some time, banks will be setting higher standards for business loans.

We can expect that some will start calling in loans from people who have never missed a payment.

Some businesses have just become too risky for the tighter standards the banks will have to meet from worried regulators. The events of the past month will only make regulators put more pressure on banks to clean up their loan portfolios.

More than ever, cash is king and queen, prince and princess, emperor and master of the universe. Need I say more?

The possibility of higher taxes will make all of this even worse. Government seems poised to tax its way out of this mess. We will have to if we have any hopes of paying for all of the commitments that are being transferred from the private sector to the federal government.

The "soak the rich" strategy that is now gaining steam means that entrepreneurs will carry most of the higher tax burden. Higher tax rates on entrepreneurs mean fewer new businesses will form. If this happens we lose the real engine of our economy — entrepreneurs — and the economy may stall.

The U.S. Supreme Court's Kelo decision of 2005, which expanded eminent domain powers for governments, has added individual property rights as another potential victim of the nationalization of our financial system. It has resulted in the most drastic weakening of property rights in the history of the United States.

This also will dampen our entrepreneurial spirit. The ride is only beginning, so hang on to your hats.

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Nashville area companies put hold on hirings

Stephen Kulinski of Gresham Smith and Partners in Nashville said he has seen a lot of qualified candidates looking for jobs at his engineering and design firm. The problem is, he isn't in a position to hire them.

"We're slowing down hiring," said Kulinski, a senior vice president. "We're just being cautious and not hiring people we don't absolutely need."

Many local companies said they aren't planning to hire until the end of this year, making job prospects tighter for the area's 45,650 unemployed workers, the latest head count by state officials taken last month.

The unemployment rate in the Nashville metropolitan area stood at 5.7 percent in August, state officials said Thursday. That's a slight improvement from July's revised rate of 5.8 percent here, but sharply higher than the 4 percent unemployment rate of August 2007.

The data were part of a county-by-county jobless report issued Thursday afternoon by the state Department of Labor & Workforce Development.

"Bottom line is nobody has a magic bullet for the economy right now," said Soumen Ghosh, head of the economics and finance department at Tennessee State University. "As long as the economy is in a downturn, I don't think the unemployment situation will be changing. It may further worsen if the credit market is not leveled off."

Nashville-based I.C. Thomasson Associates plans to hire only two or three engineers in the next three months, roughly half the number it added a year ago, said John Wimberly, the company's president.

Kulinski said his firm is only hiring people to replace open positions or if it's a strategic hire. "We're not sure what's going on with the economy," he said. "Our clients aren't building buildings."

Ghosh said sectors most affected by rising unemployment rates have been the service industry, which includes finance and banking jobs, as well as manufacturing.

In Tennessee, Williamson County reported the state's lowest county unemployment rate at 4.7 percent, up from a rate of 4.6 percent in July and 4.2 percent a year ago, according to state unemployment data.

Perry County had the state's highest county unemployment rate at 16.2 percent in August, up 7.2 percent from a year ago.

Retail employee Bob Jenkins had planned to get married on Oct. 4, but now he has pushed back his wedding because he lost his job.

Jenkins said he was told last month he was laid off as RiverGate Mall's marketing director.

Jenkins, who said he understands the decision was caused by a weakening retail market, had worked 12 years for the mall's parent company, CBL & Associates Properties, Inc. CBL said it does not discuss personnel issues.

"I'm 52 years old. It's going to be hard for me to find a job where I am making the same income because the types of jobs I'm experienced in … are limited in this market," Jenkins said.

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Vought workers may strike over pension cuts

The union representing 1,000 workers at Vought Aircraft Industries Inc.'s Nashville plant is on the verge of striking as members gather today to vote on a new contract.

The leadership of the International Association of Machinists and Aerospace Workers has recommended that Vought's production and maintenance workers reject a pact that would freeze contributions into the company pension for workers with less than 16 years of experience and set up a 401(k) investment plan.

The union committee that reviewed the offer believes it would leave retirees more vulnerable, spokesman Bob Wood said. "With everything blowing up (in financial markets), they're wanting to put everything in a 401(k)," Wood said. "People want something they can depend on."

Dallas-based Vought described the contract as its "last, best and final offer." Besides revising the retirement plan, the deal would raise wages by $1.75 an hour over its three-year term and give workers a $3,000 bonus if it is approved on the first member vote.

The contract, which applies to all of the facility's nonsalaried employees, also would improve health-care coverage for workers and their families, the company said.

"Vought is offering very competitive wages and benefits in this contract," the company said in a statement. "We are hopeful that our employees carefully evaluate the offer and vote to ratify it."

No more negotiating sessions were scheduled before a vote, which will be at the end of a membership meeting at noon today at McGavock High School. A vote against the contract could set the stage for a strike when the current agreement expires today at midnight.

Members must approve a walkout by a two-thirds majority to strike. Otherwise, Vought's offer would go into effect automatically. Maxie Garrett, the Nashville plant's human relations manager, said in a letter sent to workers on Friday that the company is prepared to continue production if a strike is called. Vought's Nashville plant also employs 200 executives, administrators and other office staffers.

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Nashville job market slows down

A snapshot of job growth in Middle Tennessee to be released today by the Nashville Area Chamber of Commerce shows what most people in the job market already knew.

The 10-county area around Nashville has created far fewer jobs in the past year than it did in 2006-2007, and economists expect net gains in employment to slow even more before the economy brightens.

The region, including Davidson and Williamson counties, had a net increase of 5,241 jobs for the 12 months ended June 30, the chamber's study period. That's less than one-third of the jobs gained in the previous 12-month period when the national and local economies were much brighter. It's also well below the chamber's annual goal of adding 11,500 net new jobs here.

"We have to be realistic that we are operating in a national and global economy. We've never seen this combination of (economic) issues coming together at the same time," said Mack Holladay, president of Market Street Services, the Atlanta consulting firm that compiled the progress report for the chamber.

The full report will be released today by the chamber's economic development arm — known as Partnership 2010. Some Tennessee-based economists warn there's an even rougher six months to come.

"We're in a cycle downward now, and we haven't seen the bottom yet. We're seeing broadly based declines in employment, and other than health and education, there are no sectors continuing to grow at this moment across the state," said University of Tennessee economist Bill Fox.

"We will see flat or even negative performance over the next six months or so, but when the housing problem bottoms out along with the settling of the financial markets, I think we will begin to see some real economic growth again," Fox said.

If there is a bright spot to be found in the chamber's study, it may be that despite weaker job numbers overall, lots of people are still moving to Middle Tennessee from other parts of the state and nation. And some cities have experienced bigger job losses than the Nashville area has seen.

Memphis, for instance, lost at least 2,100 jobs in the 12-month period through June, federal data show.

"That shows we are holding our own in a very uncertain national economy," said Janet Miller, chief economic-development officer for the Nashville chamber. "While we would like to be creating 11,500 net new jobs each year, the fact that we fell short of the goal we had set underscores that Nashville is not immune to what is going on nationally."

Area attracts newcomers

Over the past two years, though, the 10-county population has added about 40,000 people a year — a sign that the Nashville area remains an attractive place to live, the chamber's study concludes.

"Clearly, the strength of Middle Tennessee, and Nashville specifically, is diversity," said Keith Herron, regional president of Regions Bank and co-chairman of Partnership 2010.

"A lot of things are working to our advantage in this difficult economic environment," he said. "Among them is our quality of life. This is a great place to live, work and play. People who have relocated their families here have found that."

One reason for continued population gains is that people are moving here from areas where the economy is a lot weaker, said David Penn, an economist at Middle Tennessee State University.

"We're going to continue to see this divergence between population and job growth because people are moving in from places where job growth is worse," he said.

Penn said not all new residents enter the job market. "We might be getting some retirees who have had enough of Florida's real estate market and weather," Penn said.

Eventually, the in-migration will slow if there are not enough jobs to support the new residents, said Mack Holladay, president and chief executive of Market Street Services, the Atlanta consulting firm that compiled the progress report.

Nashville is doing better than Memphis, Chattanooga and Knoxville, as well as Charlotte, N.C.

Areas that are outpacing Nashville in job growth and economic development include Austin, Texas, and Raleigh, N.C., Holladay said.

Relocations are strong

Another measure of the area's economic stature — corporate relocations — has shown strong performance, meeting the chamber's goals over a two-year period, Miller said.

"Fifty-one companies have moved their headquarters into the region in the past year, bringing an average of 66 jobs per company," she said. The largest was Verizon Wireless, which brought at least 700 jobs, she said. "But the smaller companies offer big impacts, too."

The key to Nashville's continued success will be to "strengthen the diversity of the economy," Holladay said. The region needs to continue its economic-development efforts and "get better at what you're doing" to attract jobs, Holladay said. "For goodness sake, don't slow down."

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Drivers are at mercy of a few refineries

Panic buying, dwindling inventories and a pair of unpredictable storms all played a part in creating the gas shortages that tightened in Middle Tennessee over the past two weeks.

But as shocking as the short-term loss of gasoline was to the region, it could have been much worse, analysts said this week.

"We really did dodge a bullet," said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas. "If it had hit 15 or 20 miles down the coast, we could have had the refineries out for nine to 12 months."

Middle Tennessee, as well as most of the rest of the Southeast, is growing more dependent on just a handful of refineries stretching along the Gulf Coast to supply practically all of its gasoline, at the same time that producers are stockpiling less inventory, energy investors, oil analysts and professors said.

So much fuel is expected to flow seamlessly from the Gulf of Mexico to the pumps — and so few alternatives exist to move supply inland — that shortages are almost certain if any part of the supply chain breaks down as occurred this month, these people said.

As such, Hurricanes Gustav and Ike were a warning to the region, they said.

Both storms rated as Category 2 storms, the second-weakest classification for a full-blown hurricane, and they failed to cause the massive damage that many meteorologists had feared. Had either storm been bigger — or had either one not veered a bit at the last minute — this month's shortage could have lasted far longer.

Nashville remains vulnerable

Industry analysts say a number of factors made Middle Tennessee more prone to running low on fuel.

Much of the blame for this month's shortage was initially placed on panicky consumers. In the days before Hurricane Ike struck two weeks ago, rumors of a shortage began to circulate in East and Middle Tennessee, causing some people to stockpile fuel.

Sales of gasoline were four times their normal levels on the weekend that Hurricane Ike made landfall and twice normal levels in the week afterward, the Tennessee Emergency Management Agency and the Tennessee Oil Markets Association say.

A high concentration of independent operators, who have to buy their gasoline wholesale, also may have played a role in the shortage.

Stations affiliated with major chains often have long-term contracts that guarantee they will receive gas from refiners at a fixed price and time. Fearing supplies would run low as Hurricane Ike began to move ashore, refiners started holding back inventory for their long-term customers, causing wholesale prices to rise to as high as $4.87 a gallon.

Many independent stations, such as Mapco Express, apparently decided to simply wait for prices to come back down rather than pay amounts that would have meant certain losses, observers said.

"I can't imagine it's a positive thing (to not sell gasoline), but to the extent that wholesale prices were high, it may not be as bad," said Brian Shore, an energy analyst with Avondale Partners who follows Mapco.

Pipeline supplies region

As the shortage dragged on, attention has shifted to the two-dozen or so refineries on the Gulf Coast that process crude oil into the gasoline consumed in Middle Tennessee.

These refineries are connected to the region by the Colonial Pipeline, which originates in Houston and transports gas from the Gulf Coast to the eastern United States. A spur running from Atlanta and branching in Chattanooga supplies nearly 80 percent of Tennessee's gasoline.

The Colonial Pipeline escaped damage from hurricanes Gustav and Ike, but without gasoline from Gulf Coast refineries idled by power outages and other damage, the pipeline had little fuel to send.

The result was a situation that's almost unfathomable in other parts of the country, some observers said.

In the Midwest, for instance, most states have refineries within their own borders, letting them produce gasoline locally. The Northeast, meanwhile, can import gasoline through New York harbor, where it can be stored in massive tanks in New Jersey.

"New York/New Jersey can get supplies from Canada and Europe," said Antoine Halff, head of commodities research for Newedge Group, a New York brokerage. "The Southeast has depended almost entirely on those refineries. … There's a bottleneck."

Supply low before storm

Still, dependence on Gulf Coast refineries and a high concentration of independent operators may help explain why Middle Tennessee felt a shortage. But they don't explain why this pair of storms — as opposed to the countless hurricanes that preceded it — caused such a disruption.

To explain that, energy experts point to conditions on the coast. First of all, the storms came ashore in rapid succession, and both took out refinery capacity.

It was as if, instead of two minor storms that slowed production for two weeks, the Gulf Coast was hit by one massive storm that took production down for a month.

"If the storms hadn't been back to back, we wouldn't be having this conversation," said Ken Medlock, an energy fellow in the Baker Institute at Rice University in Houston.

The storms also came when inventories were low. With the price of crude oil more than $100 a barrel and demand for gasoline falling as the national economy slows, refiners had spent the summer selling the stocks they had rather than producing more fuel.

"They had no economic incentive to really push and produce more gasoline," said David Pursell, the managing director of Tudor, Pickering, Holt & Co., a Houston energy investment firm. "There's no reason to produce more if it's going to sit in a tank."

Hurricane Ike also hit in a particularly vulnerable spot. Although tropical systems strike the Texas and Louisiana coasts often, it has been 25 years since a major hurricane, Alicia, hit the area around Houston and Galveston.

In the years since then, that region has become even more important to the refining industry. With high barriers to building new refineries, producers have opted to expand existing facilities to meet rising demand rather than attempt to build new refineries elsewhere.

Meanwhile, the Southeast has grown substantially, with car-friendly cities such as Nashville, Atlanta and Charlotte burgeoning outward.

"At the same time you've had demand going up, you've been unable to build new capacity to keep up," said Bullock. "You've got a pretty large geographic area and quite a few metro areas, and refineries are probably as sparse as anywhere outside the Great Plains."

Facilities controversial

One way to keep from running out of fuel the next time hurricanes strike Gulf Coast refineries is to stockpile ahead of the storm season, much as Northeast utilities store up heating oil for the winter, some observers said.

But doing that would require an extensive network of storage tanks, and those facilities raise environmental and safety concerns. Nine years ago, for instance, Colonial Pipeline officials proposed a fuel storage and distribution complex south of Murfreesboro. That facility would have been connected to the main pipeline by a new spur running to northern Alabama.

But Rutherford County residents, as well as people living near the spur route, objected to the plan, pointing to a 1996 spill from the pipeline that cost $2.5 million as evidence the facility would be bad for the community. Colonial Pipeline withdrew the plan.

Building a storm inventory would also mean designating someone to manage the stockpile. A coalition of state governments could take on the job, energy analysts said, or they could use regulations to require the oil industry to set aside a portion of their production. Both methods would be costly, however.

"It boils down to having inventory," said Madlock. "This is going to pass, and it's unfortunate. But what it does is highlight how critical fuel supply really is."

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AmSouth mutual fund probe ends in settlement

A long-running investigation by the Securities and Exchange Commission into improper spending of shareholders' fees linked to mutual funds once run by AmSouth Bank and AmSouth Asset Management have led to an $11.4 million settlement, officials said Tuesday.

AmSouth Bank, now owned by Regions Financial Corp., and AmSouth Asset Management, settled with federal regulators who accused the mutual fund advisers of secretly using part of the fees paid by shareholders for an executive's country club membership and other expenses.

The Securities and Exchange Commission said it was the agency's first case of this kind.

The companies neither admitted nor denied wrongdoing. The $11.4 million will go into a fund that Birmingham, Ala.-based Regions Financial Corp., which acquired AmSouth, will distribute to the affected mutual funds, which are now managed by Pioneer Group.

Regions cooperated with the SEC in its investigation, a bank spokesman said.

The SEC will not tolerate advisers that seek to hide their own marketing expenses in other types of fees charged to fund shareholders, SEC Enforcement Director Linda Thomsen said in a statement.

Regions Bank did not disclose the name of the fund manager (who got the country club membership paid for). He has never worked for Regions, a spokesman said.

AmSouth Funds were sold to Pioneer Investments in 2005, before the merger with Regions Financial Corp., according to Regions spokesman Tim Deighton.

Stock downgraded

Shares of Regions Financial fell $1.88 per share, or 12.1 percent, to $13.72 in trading on the New York Stock Exchange on Tuesday. The weaker stock price was due in large part to a downgrade of the bank's stock by Citi Investment Research analyst Greg Ketron.

Ketron cut his rating on Regions Financial to "sell" from "hold" and also cut his 2008 and 2009 earnings estimates because of an expected increase in loan-loss provisions and credit costs. He said plans by the government to buy troubled assets from banks would likely set a floor for ultimate losses at banks but would not relieve near-term credit pressures at Regions Financial and other institutions.

Regions is likely to face rising losses from its residential and multifamily lending portfolios, while net interest margin — or the profit margin from lending — is likely to narrow. Nearly all banks have faced mounting losses tied to a sharp rise in mortgage defaults.

Ketron cut his 2008 earnings estimate for Regions to $1.32 per share from $1.40 per share, and his 2009 estimate to $1.25 per share from $1.45 per share.

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Buffett's $5 billion investment boosts Goldman's capital

NEW YORK — Goldman Sachs Group Inc., seeking to improve not only its balance sheet but its standing with investors, has undertaken a huge capital-raising program that includes an investment of at least $5 billion from Warren Buffett and a common stock offering for another $5 billion.

Just a week earlier, Goldman looked to be on precarious ground as its stock price plunged in response to fears that it could not survive as an independent investment bank. But the company contended Wednesday that the current crisis in the financial markets, which sent Lehman Brothers Holdings Inc. into bankruptcy court and Merrill Lynch & Co. into a sale to Bank of America Corp., wasn't the catalyst for the deals.

"Although we felt we were under no pressure to raise capital, we've always said if an opportunity arose, we would look at it," Goldman spokesman Lucas van Praag said. Raising capital "gives us greater firepower and greater flexibility," he said.

Goldman said Wednesday that it was raising $5 billion through a common stock offering, doubling the amount it announced just the night before. Goldman priced 40.65 million common shares at $123 apiece. An additional 6.1 million shares may be sold to cover over-allotments, potentially boosting proceeds by $750.3 million.

Buffett, considered among the top investors in the world, will buy through his Berkshire Hathaway Inc. $5 billion in preferred Goldman stock and receive an option to purchase an additional $5 billion in common stock.

Buffett said during an interview on CNBC "there's no better firm on Wall Street." Buffett said other investment banks, including Lehman, had approached him in recent months, but he passed on those investment opportunities. He declined to discuss the deal beyond the comments made on CNBC.

The investment by Buffett — which Goldman called an anchor for its common stock offering — probably will provide reassurances to a nervous market, said Brad Hintz, an analyst with Sanford C. Bernstein and a former chief financial officer at Lehman.

Buffett's investment will be his second major foray into Wall Street. In the late 1980s, Berkshire Hathaway invested in Salomon Brothers Inc. When the investment firm admitted wrongdoing in bidding for U.S. Treasury bonds in 1991, Buffett became interim chairman and helped Salomon reach a settlement with the government before stepping down in 1992. Salomon was later sold to what is now Citigroup Inc.

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Be wary of medical discount cards

Mark Sarmadi, a diabetic, thought he had found the answer to getting health coverage when a salesman pitched him what he thought was a low-cost insurance program.

Instead, it turned out to be a medical discount card that didn't live up to its promised benefits.

"Clearly it was all a big hoax," said his wife, Debbie Sarmadi, who was able to recover $498 in fees after the state's attorney general got involved. Direct Benefit Services LLC, the Brentwood-based company that sold Mark Sarmadi the card, has since folded after agreeing to refund money to 91 Tennesseans among its clients nationwide.

With the rising cost of health insurance, many more consumers are likely to be pitched similar discount programs. But experts warn that the plans often promise big savings that never fully materialize.

"A lot of people who are selling, they make it sound like it's insurance but it's really not," said Jim Walker, president of Individual HealthCare Specialist Inc., an insurance broker in Brentwood. "They're easy to sell because people think that they're getting a really good deal, but it's not a really good deal."

For a one-time fee of roughly $150 to sign up, plus monthly fees that range from $49.95 to $199.95, medical discount cards promise a certain level of care from participating dentists, doctors and even hospitals.

Some of the programs work well, especially for people not otherwise able to get insurance. But many programs have shortcomings, experts said. Some exaggerate the savings they provide; some have a small number of medical providers; and sometimes people who don't buy the cards can negotiate similar discounts with their own providers.

"If you see a promise that sounds too good to be true, it probably is," said Jennifer Libster, a senior research associate with Georgetown University's Health Policy Institute in Washington, D.C., a co-author of a 2005 study critical of the industry.

States pass regulations

"I've just heard so many horror stories of people who thought it was health insurance and ended up with thousands of dollars in bills," said C. Steven Tucker, president of Small Business Insurance Services Inc., a broker in Palatine, Ill.

Some companies in the discount card industry have pledged full disclosure to consumers as a way to protect their reputations. Through the Consumer Health Alliance, a trade group, several companies disclose that their programs aren't insurance, and they allow consumers to cancel within 30 days for a full refund.

"We want to preserve consumer access to discounted health-care benefits and services and ensure that programs are being offered in a responsible, consumer-friendly way," said Allen Erenbaum, an attorney with the Dallas-based association. The group'smembership lists about 500,000 people in Tennessee, or about 10 percent of the insured population, covered by such plans or cards.

Some consumers have discount cards for certain services — perhaps just prescription drugs — in addition to regular insurance coverage. Even mainstream insurers have created discount card products. Aetna's Vital Savings, for instance, offers savings up to
50 percent off some dental services and up to 40 percent off some prescription drugs.

Several states, meanwhile, have passed regulations governing medical discount plans. Florida requires such companies to be registered with the state, file annual reports and obtain approval of rates that rise above a certain level.

Alaska requires a number of disclosures and says the discount plans must have contracts with providers, including doctors, in the state. Linda Hall, director of Alaska's division of insurance, said the laws were passed two years ago after residents bought discount cards that had no medical providers signed up in Alaska.

In Tennessee, the state's Department of Commerce and Insurance has received complaints or inquiries from consumers, including ones about companies not paying for what was promised. Shannon Ashford, the agency's spokeswoman, said more of the plans are emerging as health insurance becomes more expensive and harder to obtain.

"Consumers need to be alert and investigate these types of plans before enrolling in one and paying out any money," she said.

Law requires disclosure

Annie Gifford, who lives in Franklin County, Tenn., said her husband, Bobby, paid a $498 fee for a discount program after a saleswoman told him that past medical problems that had made him uninsurable elsewhere didn't matter. Gifford later realized her husband had signed up for a discount card, not health insurance.

"She promised 80 percent off surgeries, hospitalizations like a major medical policy," Gifford said of the saleswoman. "It turned out to be discounts of 10 percent to 15 percent."

Tennessee law bars the sale or marketing of such cards unless they clearly disclose that the discounts offered are not insurance. Also, each health-care provider connected with a card must have a contract to deliver the promised discounts, which can't be misleading, deceptive or fraudulent.

Mark Sarmadi, who spends $300 a month on insulin, syringes and other diabetic supplies, said he was wooed by promises of paying only $10 — in addition to a $498 sign-up fee — whenever he bought medicine. But when the Brentwood car dealer went to the pharmacy, he was told the card carried no benefits at all.

Georgetown researcher Libster said targets of such plans include the elderly, immigrants and low-income consumers. She expects an increase in the plans as people face more out-of-pocket medical expenses, including higher deductibles for health-care visits.

"There are some cards that offer legitimate discounts and do represent themselves honestly," Libster said. "Unfortunately, there are enough bad actors in the industry that it makes it hard for consumers."

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Fed urges U.S. to pay more for bad assets

WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that the government should pay more than "fire-sale" prices for the toxic assets it would acquire under a proposed $700 billion bailout plan. That could mean higher initial costs for taxpayers and reduced returns when the assets are later resold.

Bernanke's comment was the first indication of how he and Treasury Secretary Henry Paulson are thinking about formulating the rescue plan's medicine in a way that doesn't kill the patients. Requiring banks and other financial institutions to sell troubled loans and other assets anywhere close to recent sales prices of only a few cents on the dollar could wipe out the net worth of many and lead to a new wave of bank failures.

The Fed chairman said he favors buying the assets based on their "hold-to-maturity" value, which would require an estimate to be made of what each security will eventually be worth as payments come in over the years.

"If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits," Bernanke told the Senate Banking Committee. "First, banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down."

"I understand what (Bernanke) is trying to accomplish," said accounting expert Art Bowman, who publishes Bowman's Accounting Report. At the same time, it may be difficult to discern when the market turnaround will occur.

"When does that mean?" Bowman said. "What does maturity define?"

In contrast, current accounting rules require banks to use "mark-to-market" valuations that require them to value their holdings based on the price at which similar securities have recently been sold.

But, as Bernanke notes, if the government drives a hard bargain in buying these distressed holdings, it risks wiping out the reduced equity of many banks. "This creates something of a vicious circle," he said.

Even after paying higher prices, the government could eventually turn a profit if the assets rise in value after the housing market recovers, but analysts said that was far from a certainty.

Unclogging credit is vital

The government's goal in the bailout plan is to put stressed financial institutions in a better position to raise capital and lend more freely. Unclogging credit problems is critical to helping the faltering economy get back on its feet.

Paulson, who appeared with Bernanke at the Senate Banking Committee hearing, said he envisioned using different methods to price the range of distressed securities that the government would buy from banks under the massive plan. But he said pricing the soured debt will be tricky.

"We asked for broad-based authorities to use a series of market-based approaches. We'll be dealing with different approaches in different situations," Paulson said.

The Fed's apparent decision on pricing illustrates conflicting goals: enabling the government to pick up assets more cheaply versus helping crippled financial institutions recover and thereby spur the economy, said economist Bernard Baumohl, executive director of The Economic Outlook Group.

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Stocks dive, oil soars on wobbly Wall Street

NEW YORK — Elation in the financial markets over the $700 billion bank bailout plan evaporated Monday and was replaced by all-too-familiar anxiety, pummeling stocks and sending oil prices to their biggest one-day gain.

Worries that the rescue package would cost too much, drive up inflation, swell the already-bloated deficit and hurt the ailing economy also led global investors to flee the U.S. dollar.

The Dow Jones industrials lost 372 points, wiping out the gains the index made Friday after administration officials and congressional leaders promised swift action to get bad debt off the books of banks and end the financial crisis.

"Investors had a weekend to look at the news that was streaming out, and they are now finding fault in it," said Joseph Battipaglia, market strategist in the private client group at the investment firm Stifel Nicolaus.

Oil prices briefly spiked more than $25 a barrel before falling back and settled at $120.92, up $16.37, on the New York Mercantile Exchange. That shattered the previous record for a one-day jump in crude oil, $10.75.

Monday also was the last day for investors to trade the October oil futures contract, adding fuel to the rally. But the November contract also saw a sharp gain, up $6.62 to $109.37.

The government agency that regulates commodities markets said it was working with Nymex to "ensure that no one is taking advantage of the current stresses facing our financial marketplace for their own manipulative gain."

The Commodity Futures Trading Commission said in a statement that it was "closely monitoring today's large movement in the price of crude oil."

Analysts said some of the gain could have come from large investors trying to cover short positions, or bets that prices would fall.

Investors want details

Four days after word of a massive government rescue plan began to hit the market, investors had little by way of details. Treasury Secretary Henry Paulson introduced the plan Saturday in a document that ran less than three full pages.

By Monday, investors still knew little about how the Bush administration would pay for mopping up the bad debt, how the process would work, who would run it and what the Democratic-controlled Congress would ask for to approve the plan.

The Bush administration is already forecasting that the federal deficit will hit a record $482 billion next year.

Analysts say the bailout costs mean a $1 trillion annual deficit is not out of the question.

"When you try to print $1 trillion, that will kill your currency, lifting oil prices, which then in turn will not help the stock market," said Gary Kaltbaum, who runs the money management firm Kaltbaum and Associates in Orlando, Fla.

"It is a vicious cycle, and we are seeing that right now."

Lacking specifics, many investors, especially foreigners, sold U.S. dollars on worries that paying for the plan would increase the federal deficit and exacerbate inflation. Over the past year, overall inflation is at 5.4 percent.

The 15-nation euro rocketed past $1.48 in late afternoon trading Monday, up more than 3 cents from Friday in its largest single-day move against the dollar since the European currency was introduced in 1999.

The British pound leaped to $1.8584 from $1.8365, and the dollar dropped to 105.40 Japanese yen from 107.01.

The price of gold, a traditional safe-haven investment in times of financial turmoil, rose $40.30 and settled at $909 an ounce.

The Dow finished at 11,015.69, down 372.75 points, more than 3 percent.

The sharp drop was reminiscent of last week's wild trading, which included two days of 400-plus-point drops for the Dow and two days of 300-plus-point increases.

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Laws cover workplace postings, document retention

Employers have certain housekeeping duties imposed by law concerning document retention and posting notices in the workplace.

Various federal laws have different rules about how long companies must keep records. A good rule of thumb, however, is to keep most employment-related records of any kind for at least three years.

Federal income tax information in the form of W-4 Withholding Allowance Certificates and W-5 Earned Income Credit Advance Payment Certificates should be kept for four years.

Tennessee has a specific regulation requiring employers to retain some records on each employee for at least seven years. Records to be kept seven years must show each worker's name and Social Security number; date hired, rehired and terminated; full-time weekly wage; number of hours for which the employee was paid (except for workers paid a salary); gross wages for each pay period and total wages for each calendar quarter; value of any remuneration other than cash; and any special payments such as bonuses, gifts or prizes.

The Americans with Disabilities Act and the Family and Medical Leave Act require that employers maintain all medical information on separate forms and in separate files. The files must be locked up and kept confidential.

Notices must be posted

Federal and state laws require employers who are covered by certain laws to post notices giving their employees information about their rights. Notices are typically posted in employee break rooms or in some other prominent place.

The federal laws that potentially apply are listed on the U.S. Department of Labor's Web site. Employers can determine which laws apply to them by reviewing that site or calling the department. There are posters that consolidate the notices applicable to an employer.

Typically, the poster would cover at least these federal topics: the Fair Labor Standards Act, showing minimum wage, overtime pay and child labor laws; Equal Employment Opportunity Laws; Job Safety and Health Protection (OSHA); and Uniformed Services Employment and Reemployment Rights Act. Depending on the size of the employer, the poster might also cover the Family and Medical Leave Act.

Tennessee also has posting requirements, and the state Department of Labor and Workforce Development has a poster that would apply to most small employers. This comprehensive poster also covers unemployment, workers' compensation and the Polygraph Protection Act.

Tennessee's comprehensive poster doesn't cover the new anti-smoking act. But employers must post notices about the new law and nonsmoking signs or symbols at all entrances.

Finally, employers must designate regular paydays and post a notice about those dates.

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'New Mass Affluent' market is tantalizing but hard to reach

John Houseman, the Academy Award-winning actor who had a late career as a corporate pitchman, famously said for Smith Barney investments, "We make our money the old-fashioned way. We earn it."

Marketing researchers label one group of Americans who took that slogan to heart as the "New Mass Affluent," and marketers covet their spending.

The New Mass Affluent category is big — 19 percent of all U.S. households. Its members have incomes double the national median and have more than $100,000 in income-producing assets. See why marketers chase them?

While those in the New Mass Affluent category are abundant and are in the same general age range, they are far from homogeneous. Marketers must work to understand them.

Backgrounds are modest

These baby boomers (born 1946-64) grew up in households led by members of the Greatest Generation, graduated from college and earned their money. They didn't inherit it.

They live in "second cities" such as Nashville more than in the large metropolitan areas such as Chicago, New York or Los Angeles that traditionally have been home to the wealthiest Americans.

Even if they grew up modestly, the New Mass Affluent market does have a love for luxury and status-symbol products. According to Mediamark Research & Intelligence, the group indexes high for vacation home ownership, foreign travel and owning the latest technology.

The group also is more likely to belong to country clubs, donate to the local National Public Radio affiliate and own big-screen television sets.

Despite those consumption proclivities, they also shop at discount stores such as Costco, wear costume jewelry, drink domestic beer and clip coupons for groceries and household products. How's that for a paradox?

The oldest members of the New Mass Affluent market are entering their 60s. They are moving from a life of asset accumulation, through the empty-nest period and on to planning for retirement. The Bank Administration Institute estimates that more than $16 trillion in assets will pass through boomers' pension and 401(k) plans.

Report profiles boomers

The Nielsen Co., which deals in market and media research, recently released its "Affluence in America" report and found that these affluent boomers "are sophisticated consumers who often tune out traditional marketing strategies. Perhaps most challenging of all, many simply don't think of themselves as rich," said Jane Crossan and Mike Mancini, vice presidents at Nielsen.

Nielsen's Claritas geo-demographic profiling system divides the New Mass Affluent market into these eight distinct segments:

• The Wealth Market: They closely resemble the traditional view of "old money." These couples are over 65 and have more than $500,000 in income-producing assets.

• Business Class: These couples are in their 50s; have an average household income of almost $123,000 and are likely to carry gold or platinum credit cards.

• Power Couples: These mature couples are empty nesters with average household incomes of almost $119,000.

• Family Fortunes: These are middle-age families with children in the household. They lead the New Mass Affluent category with household incomes above $200,000.

• Retiree Chic: These upscale older couples already are using their income-producing assets to supplement their lifestyle.

• Big Spenders: This is another middle-age group with kids, but they are spending rather than accumulating assets.

• Jumbo Mortgages: These baby boomer families live in affluent suburban subdivisions, but they have the lowest average household income at $87,937.

• Prosperous Parents: These are middle-age families that are focused on raising their children, paying off mortgages and investing in college savings plans and retirement accounts.

Understanding the New Mass Affluent market and tailoring marketing messages accordingly works to a business owner's advantage. Perhaps that way, you can follow John Houseman's lead and "earn" their business.

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Retailers face dire holidays forecast

It's beginning to look a lot like a terrible Christmas season.

Retail sales in October through December are expected to grow a meager 1.5 percent over last year, the weakest in 17 years, as shoppers pressured by a troubled economy curb spending, according to a forecast by Columbus, Ohio-based TNS Retail Forward consultants. Some Nashville-area retailers paint an equally gloomy picture.

"We're barely above water," said Tony Owen, manager of Hickory Hollow Mall's Dress Code, where sales are down 30 percent and his apparel store is almost $20,000 in debt.

In response to the sour economic headlines, retailers plan to hire fewer seasonal employees, streamline or reduce inventory and ramp up discounts.

Other shop owners and chain stores say they'll focus on a handful of must-have gifts such as electronics and educational toys or offer enticements like discounted online shipping and free-of-charge $10 gift cards mailed in bulk to lure shoppers to their aisles.

But it's likely to be an austere season. "It's going to be pretty impossible for retailers to have any positive retail sales," said Britt Beemer, chairman of Charleston, S.C.-based America's Research Group. "I think mall retail stores are going to be challenged like never before this year, and the question is how many of them will make it."

Beemer estimates that at least one in four parents will not swap gifts with each other in order to put presents under the tree for their children. That means a number of stores are betting on children's toys to get them through the season.

For instance, Wal-Mart is selling the Fisher-Price Kid-Tough Portable DVD Player, which costs about $150 on Walmart.com, betting that if parents buy any gift, they'll feel good about paying for a toy that is educational and interactive, said Glen Gabardi, Wal-Mart's vice president and regional general manager for Tennessee.

Wal-Mart, like other discount retailers, has been among the few stores that have fared well in recent months. The retail giant posted record second-quarter earnings for the three-month period ending July 31.

Apparel and specialty stores, though, are expected to see flat to no growth this season, and department stores will be especially hurt as higher-income shoppers shy away from stores, according to TNS Retail Forward's analysis.

"Unfortunately, the trends in economic conditions offer no signs of an impending recovery," said Frank Badillo, the firm's senior economist.

Many clothing and department stores are planning to reduce inventory for the Christmas season — meaning there will be fewer gifts to buy and less variety.

"Retailers are going into the holiday season with eyes wide open," said Scott Krugman, spokesman for the Washington-based National Retail Federation. "They are managing their inventories very carefully … they don't want to be left with too much to clear out" after Christmas.

The amount of cargo shipped to retailers this year is expected to fall 6 percent compared with a year ago, the National Retail Federation said.

Belk, the department store chain that has beefed up its presence in Middle Tennessee, said it would reduce the variety of colors it stocks on various items and is eliminating inventory that did not sell well last year. J.C. Penney also plans to reduce inventory.

"It's to be in line with demand, in line with the current economic environment," said Quinton Crenshaw, a J.C. Penney spokesman.

In search of $300 jeans

Higher-end stores like Posh Boutique are hoping a smaller but more exclusive inventory will still attract wealthier consumers.

Terrah Hamilton, buyer and district manager for Posh Boutique, said she has become pickier, reducing overall inventory but adding 10 to 15 brands that aren't sold at neighboring competitors. For example, she has added jeans from Swedish companies Nudie Jeans Co. and Acne Jeans, which retail for $200 to $300 a pair.

Lauralee Robey, 20, said uniqueness is a selling point for her. Robey, who lives downtown and works at the Hill Center at Green Hills, said she once spent $80 on a unique bracelet for a friend's birthday. She said the economy hasn't affected her plans for Christmas shopping this year. "It's memorable," Robey said.

Smaller staffs planned

Retailers plan to hire fewer seasonal employees this fall and winter, though, in an effort to trim costs. Wholesale and retail hiring intentions were at the lowest levels since 1991, according to a recent survey by Milwaukee-based Manpower Inc. in which 13 percent of retail and wholesale companies said they'd reduce hiring between October and December.

J.C. Penney in CoolSprings Galleria will hire 10 fewer employees this Christmas season, a 17 percent decrease from last year, store manager Denise Mann said.

Shoppers can also expect a more intense, competitive marketing push because there are five fewer shopping days between Thanksgiving and Christmas this year, said analyst Betty Chen of Wedbush Morgan Securities in San Francisco.

"I think the concern is, 'How do you maximize those days as much as possible?' " Chen said.

One idea is to lure customers in with free gift cards. At MacAuthority, an electronics store that sells Apple computers and iPods, the company plans to mail gift cards of at least $10 in value to entice customers to come in and buy Apple products, said Mark Gregory, the company's CEO and president.

Other analysts say major chains are likely to soften their marketing messages to better appeal to increasingly fragile consumers, who not only are grappling with shrinking 401(k) accounts and diminished home values but also may be losing faith in the U.S. financial system in the wake of the upheaval on Wall Street.

"This is like watching a car crash, but the two vehicles haven't hit yet," said Marian Salzman, chief marketing officer for public relations agency Porter Novelli. "Consumers are going to be paralyzed through Christmas."

Advertising gurus say that stores need to tweak their sales messages to be more sensitive to uneasy consumers, similar to what many did after the Sept. 11, 2001, terrorist attacks.

"We are facing a difficult time, and retailers need to be conscious of that and be very flexible," said Richard Kirshenbaum, a founder of advertising company Kirshenbaum Bond & Partners. Merchants should reconsider any "highly confident and optimistic tone," he said.

Instead of trying to sell a dress, clothing stores should sell the attitude, style and confidence consumers get from the product, said Peter Arnell, chairman and chief creative officer of The Arnell Group, a subsidiary of Omnicom. Stores "need to give them trust and encouragement," he said.

That may be particularly true if consumers grow even more worried.

Deloitte Research predicts total holiday sales, measured November through January and excluding motor vehicles and gasoline, will rise 2.5 percent to 3 percent over the year-ago period. A rise of 2.5 percent to 2.8 percent in the November through January period would be the smallest gain since 1991, Deloitte noted.

Online sales to dip

Retail Forward said online sales growth could reach 9 percent this holiday season, but even that seems weaker compared with the 19 percent growth turned in last year for the category.

"These shoppers who are more likely to shop online have turned increasingly value-focused in recent months as they have felt worse off with regard to investments, home values and other economic measures," Badillo of Retail Forward said.

Some online retailers hope to attract shoppers with low shipping fees. Harry & David is sweetening the deal for online and catalog shoppers by giving as much as a 35 percent shipping discount on some orders in hopes that consumers buy their well-known gift baskets with fruit at a higher volume, said Bill Ihle, the company's executive vice president.

Re-Re Mayfield, an avid shoe shopper strolling past stores in the Hill Center at Green Hills one day last week, said she'd spend $200 on shoes for herself this Christmas. Last year, she spent $1,200 on shoes for her entire family.

"The gas prices are so high, I can't afford to buy my shoes," Mayfield said, adding that her favorite pair of shoes are her $275 Kenneth Cole sandals. She recently bought knockoff shoes in order to save money.

Melissa Brown, 39, of Franklin, plans to spend $2,000 on gifts for her four kids, down about $1,000 from her spending level in 2007. And instead of giving presents to extended family members, she's considering going on a vacation with them in order to save cash.

"There is not enough money," said Brown, an account executive. "Groceries cost way too much."

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Wall Street's rocky week: how local experts see it

Wall Street just ended a dramatic week that saw nothing short of the restructuring of America's financial system. In a five-day span, the public watched Lehman Brothers file for bankruptcy, Merrill Lynch sold to Bank of America for a fire-sale price, and the federal government launch what could be a superfund to absorb as much as $700 billion in bad loans. To help understand and explain the week's events, The Tennessean assembled four investment and banking experts. The full round-table discussion was Webcast on Tennessean.com on Friday and is available there for replay.

Were the actions taken by the government enough to restore investor confidence? And was it the right thing to do?

Stephen Frohsin: The government is the only one with the balance sheet that could have come in to do what needed to be done. It's almost like the Treasury coming in and calling a timeout in the middle of a game. A lot of the measures taking place … are temporary, but they're meant to keep the capital markets intact. It was necessary to keep our markets solvent, both the capital markets and U.S. commercial banking system.

Matthew Wright: I think it's the enormity of the situation. What the common person on the street doesn't really recognize is that a company like insurer American International Group is such a large institution … if that institution were to fail, everyone who wrote (certain) contracts with them would fail, whether they be hedge funds, whether they be investment management firms, whether they be firms that manage money market accounts. And it would just permeate through the entire financial system.

Tim Davis: I'm not sure it's necessarily fair. But what it comes down to … was a lack of confidence. How do you restore that confidence? It's like a wildfire that you see out in California in the summertime. It's very hot, and they start sending in ground firefighters to put it out and aerial things to put it out. American households are wondering, if I wake up tomorrow, can I get up and use my ATM card? Right now, everyone is staying (home).

Will a government-run fund to absorb bad loans for the banking industry actually work?

Wright: I think ultimately it will work. The government is going to be taking on these loans at a discount and these loans are at depressed values, so there is some opportunity for some upside. The more troubling thing is what position does it put our economy in as it relates to our ability to finance this? The government can print money, but they have to issue debt to counterbalance the issuing of money. The implications of this is going to be higher interest rates, as we issue more debt to attract more assets to us to pay down these expenditures and, quite possibly, higher taxes.

I think what we all have to think about here are the long-term repercussions. This instills confidence … into the system, but there are some long-term pains that we all will have to endure as well. There's going to be a burden for our generation, the next generation and probably the one after our kids' generation.

Frohsin: For us to have gotten into the situation where insolvency was the next step for a lot of large financial institutions, well, you can say it's a bear market. But something about this economic situation was so different that it caused 150-year-old businesses to fail. The medicine here was an emergency application. That's why it's temporary, like the short-sell rule.

This was such a failure of all the regulators to allow major investment banks to take on 30-to-1 leverage on a balance sheet. When it works, that's what drove earnings and that's what made executives a lot of money. But you got to a point when the leverage no longer worked, when everyone is trying to sell an asset at the same time, and there are no borrowers.

Going forward you're going to see a lot less leverage from whatever investment banks are left. Right now there are two. This is a lesson, but it's also an awfully expensive lesson.

Have we crossed a line, where the regulatory environment going forward for years to come will be much stricter? Is there any going back to the old way?

Frohsin: Things ebb and flow. I think things are going to get a lot tighter. In 20 years, maybe people will forget.

Davis: I think with mortgage rates, you're going to see long-term mortgage rates decline over the year. We saw a great drop in long-term fixed rates this week when the stock market fell. That's great if you can qualify.

We have to make it not so tough to qualify. The homeowner that got into something that was exotic, with a hybrid mortgage, an adjustable-rate mortgage, they need a little bit of relief, because they're still making an income. We're going to see lenders not worried as much about these loans and more willing to do loan modifications. If you are a homeowner and made a bad decision in your loan, chances are you can call your lender and make some changes.

What about an effect on commercial lending?

Frohsin: We're looking out the window now (of The Tennessean building) at a couple condo projects. Anecdotally, here in Nashville, people who came here to do a deal, the bank required 5 percent equity and they borrowed the rest. They had very little skin in the game.

Those same builders are being required to come up with 20 percent equity. These are multimillion-, tens-of-millions-of-dollar deals. You have to be able to raise capital now. That will flush out the Johnny-come-lately builders. I'm not a commercial lender, but a lot of those deals were put together with five-year terms, but I can imagine those terms will be tighter when they come up for renewal. Residential real estate is the first to see the shoe drop, but I think oftentimes, commercial real estate is the last place to see the shoe drop. I'm pretty bearish on commercial real estate.

Do you feel there's a criminal element in what we're experiencing that hasn't come to light?

Michael E. Ryan: In this situation it doesn't feel like there's illegal or criminal activity like there was back in 2001 or 2002. We'll know in probably a year or two when the first business book or second book comes out. We'll know what went on like we do with all these financial crises.

I just moved to Nashville six months ago. Prior to that, I was in New York and I spent seven years at J.P. Morgan, and we had pretty strict financial controls. There were deals that we passed on that were clearly over the line … but other firms gladly took them because they were a revenue generator. I think you see J.P. Morgan coming through this because of the financial controls internally. Some firms just got way over the line.

Frohsin: It was greed that drove us to this crisis more than any criminal element. This was pure greed, particularly on Wall Street. There are certain firms that escaped a lot of this — firms like J.P. Morgan who have done a pretty good job of staying out of trouble. There are other CEOs, some of whom are no longer at their firms, who took on such leverage to grow earnings … that led to a combination of greed, and a poor, poor regulatory environment allowed these portfolios to continue to grow when they should have contracted.

There's been some talk that the government's actions may lead, or have led, to something approaching socialism. What's your reaction to that?

Wright: Whenever you have massive intervention like this, it takes away natural economic opportunities that should evolve and materialize, and by having such intervention it has the head of socialism. But I think the biggest thing is that it takes away a sense of accountability from the investor's standpoint. People should understand the difference between risk and reward in the decisions they make.

Frohsin: Let's hypothesize what happens if there wasn't any "bailout." Quite possibly you'd have had a run on the banks. Wouldn't people then have been looking at the government to do something?

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Financial rescue leads rally in stocks

WASHINGTON — Stocks rallied strongly Friday after Treasury Secretary Henry Paulson and top elected officials pledged to expedite a rescue plan for the nation's troubled financial sector.

The Dow Jones industrial average gained 368.75 points, or 3.35 percent, erasing the week's losses. Other major indexes also gained 3 percent to 4 percent.

House Speaker Nancy Pelosi said the House would stay in session past its scheduled adjournment next week if needed to deal with the crisis. "We are committed to quick, bipartisan action," she said.

That assurance, and new measures announced earlier Friday to grease the nation's financial wheels, helped propel the rally in stocks.

After watching the credit market grind to a near standstill, the government said it would lift the financial sector by taking on the bad debts of troubled banks, propping up money-market mutual funds and temporarily banning short-selling of financial stocks.

The rescue could involve government guarantees worth hundreds of billions of dollars, Paulson said. "This needs to be big enough to make a real difference," he told reporters Friday morning.

"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," he said.

In a brief appearance later Friday morning, President Bush reiterated that the action is necessary. "These measures will require us to put a sig-
nificant amount of taxpayer dollars on the line," Bush said. "This action does entail risk, but we expect that this money will eventually be paid back."

Paulson said he, along with Federal Reserve Chairman Ben Bernanke, would work with members of Congress throughout the weekend to craft a pro posal, which he referred to as a "troubled asset relief program."

It was whirlwind week

The government's actions cap a dramatic week in which Lehman Brothers was forced into bankruptcy, Merrill Lynch was quickly acquired by Bank of America, and American International Group accepted a $85 billion government loan to avoid bankruptcy.

Lawmakers have said they will work quickly to pass a plan, which probably will provide a way for financial companies to get troubled assets off their books. Congress is scheduled to adjourn for the year at the end of next week.

Among the actions taken Friday to unfreeze markets:

• The Treasury Department said it would temporarily insure money market mutual funds up to $50 billion for firms that pay a fee to participate in the government program.

"Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets," Treasury said.

• The Federal Reserve said it would lend money to banks to buy high-grade, asset-backed commercial paper from money market mutual funds. That will give them cash to handle redemptions by clients.

The Fed will assume the risk for the loans, meaning if they are not paid back, the central bank will lose. That said, senior Fed staffers Friday said they do not expect that to happen.

• The Securities and Exchange Commission temporarily halted short-selling in the stocks of 799 financial companies to "protect the integrity and quality of the securities market and strengthen investor confidence," the agency said. Short-selling is making a bet that the stocks will fall. The practice has been blamed for accelerating declines in financial stocks, or worse, forcing companies into bankruptcy or mergers.

• The Treasury Department said Fannie Mae and Freddie Mac would increase purchases of mortgage-backed securities, providing fresh money to mortgage lenders.

Washington Report: What if Fannie and Freddie Need Capital Infusions?
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Fannie, Freddie rescue plans leave investors anxious

Legal action over flooding may not be worth trouble

We bought a house (built in 1965) on Dec. 18, 2006. Six days later, heavy rains flooded a storage-room area on the lower level. We called the real estate agent, who claimed that the prior owners had no knowledge of any water problems and suggested we call a handyman, who came over and did some work. The room has continued to flood. Is it possible to bring legal action now or is there a statute of limitations on this type of thing? — Nancy

Every state has a statute of limitations, which means that after the statutory period of time, you can no longer file a lawsuit. In the District of Columbia, where I practice law, it is three years; it will vary by state. You should check with a local attorney to determine what this period is in your state. And although you discovered the problem on Christmas Eve, if you are still within time, I would treat the day you bought the property as your target date.

However, you raise a key question: How difficult would it be to prove that your seller knew about the problems? If you can find repair or plumber bills during the time your seller owned the property — or if neighbors are willing to testify that they saw plumbers in the property on several occasions — that may be strong enough to take the matter to court.

But litigation is time consuming, expensive and always uncertain. Perhaps you would be wise to chalk this up to a bad learning experience and correct the problem on your own.

My daughter and her husband own a small, unoccupied, well-maintained home that has been on the market since October 2007. They have received no reasonable offers to buy and have been under a great deal of pressure from the Realtor to reduce the price. They did reduce it by $20,000, but still no offers have been made anywhere close to the asking price. In February they took the house off the market and listed it with a rental agency. Among the interested parties was a rent-to-buy offer. They are not sure how safe this situation is, but feel that someone who may purchase the home in two years would take better care of it than a short-term renter. What is your advice on such an arrangement? — Dinah

Clearly, having a rental income and having someone live in the house is better than having no rent and a vacant property. There are two kinds of rent-to-buy arrangements:

One is rent with an option to buy. Here, you set a price that the tenant will buy at the end of the stated term. There is no guarantee, however, that a sale will ultimately take place. Furthermore, this is a gamble on both sides. The property may be more valuable two years from now, but you will be selling at the price you set today. Alternatively, the market value may decrease, in which case your tenant will either want to negotiate a new price or walk away from the transaction.

Another option is the right of first refusal. No price is set, but at the end of the term, you try to sell the property and when you get a valid offer, your tenant has the right to match it.

In either situation, you need a local attorney to assist you in drafting the legal documents to reflect your agreement. So long as you get a decent tenant, I agree that if the tenant ever plans to buy your property, he or she may take better care of it.

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Slumping banks rush to secure partners

NEW YORK — Wall Street entered into another round of speed dating, with bankers representing Morgan Stanley and Washington Mutual scrambling to put together deals in the biggest realignment of the financial industry since the 1930s.

Once vaunted investment banks like Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. have lost their independence or been toppled at a breath-taking pace. And for a time on Thursday, fears intensified that the spreading credit crisis threatened to drag down the remaining global financial institutions and Main Street banks alike.

Shares of financial stocks initially plunged, then recovered as part of a dramatic afternoon reversal for most stock indexes after CNBC reported that Treasury Secretary Hank Paulson might back the creation of an entity like the Resolution Trust Corp. to soak up bad loans and defaulted mortgages. The RTC was created by the government during the savings and loan crisis of the 1980s.

Treasury officials declined to comment about whether that report was accurate.

Morgan Stanley slumped more than 46 percent in early trading as investors fretted about its ability to quickly find a buyer or cash infusion from a foreign investor. Goldman Sachs Group Inc. skidded 25 percent.

Morgan Stanley shares rallied to close up about 4 percent, while Goldman Sachs' stock was lower by almost 6 percent. And Washington Mutual Inc. shares soared more than 48 percent.

Senator offers alternative

Sen. Charles Schumer, D-N.Y., put forth his own proposal, calling for the government to lend struggling banks money in exchange for an equity stake. In return, banks would back legislation allowing homeowners who have declared bankruptcy to renegotiate their mortgages in order to keep their homes. Schumer contends that an RTC-like entity could find it difficult if not impossible to sell off complex mortgage-related investments.

That might provide the lifeline needed to help prop up the ailing banks and investment banks, said Anthony Sabino, professor of law and business at St. John's University. He noted, however, that CEOs might still go ahead with deals they believe make sense.

"This is history repeating itself," he said. "The debacle of the S&L crisis created the RTC, and we are faced with a similar crisis because we didn't learn from history. This is yet another lifeline."

But the question is whether such a plan could be turned into reality soon enough to take the pressure off Morgan Stanley and Goldman Sachs to do deals.

"People are finally realizing that we are probably in the worst financial crisis since the Depression," said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. "We're in a period of excessive fear."

Stable funding base sought

Recent market turmoil has heightened fears that investment banks, which rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, need to find more stable sources of funds to ride out market volatility.

Some investors believe that the investment banks must combine with an institution that offers a stable base of bank deposits. That was one of the reasons Merrill Lynch agreed to be acquired by Bank of America Corp. earlier this week.

Economists, including former Federal Reserve Chairman Alan Greenspan, predict that more banks will fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.

The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.

Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.

Investor Report: Cash for Future Equity
What’s next after Black Monday?

Vanderbilt signs deal to provide care for Predators

Expect doctors and other medical staff from Vanderbilt University Medical Center along the boards at Nashville Predators hockey games, along with prominent advertising signage.

On Wednesday, the hospital announced that it had signed up as the official health-care provider for the hockey club. Vanderbilt replaces Saint Thomas Health Services, which ended its 10-year run in that role three months ago after talks about an extension failed to produce an agreement.

Vanderbilt's multiyear partnership marks its first foray as a major league sports sponsor.

Neither party would disclose financial terms.

"It seems like a naturally good marketing platform for us," said Joel Lee, associate vice chancellor of medical center communications. "The Predators' fans are generally young families — a good demographic for us to look at from a marketing standpoint."

Players, coaches and Predators' employees will get medical care, injury prevention, rehabilitation and other services from a team of Vanderbilt doctors, trainers, therapists and others. Vanderbilt also will have first-aid stations at Sommet Center hockey games and other events.

The deal builds on a relationship between the Predators and Vanderbilt that had included Vanderbilt buying tickets and sponsoring a suite during the hockey season, as well as Predators' players visiting patients at Vanderbilt.

Vanderbilt's Monroe Carell Jr. Children's Hospital will be a special focus of the charitable and player involvement aspects of the latest deal, Lee said.

"We hope for greater visibility for our children's hospital from a fundraising standpoint," he said. "In general, we would expect any kind of marketing we do to result in additional patient flow."

Other Vanderbilt sponsorship ties to sports have included the Nashville Sounds minor league baseball team, sports medicine and emergency services work with Belmont University and relationships with Vanderbilt University's football and basketball teams, Lee said.

Team physician named

Dr. Jed Kuhn, a Vanderbilt orthopedic surgeon who has worked for the USA Hockey National Team Development Program and the U.S. Olympic Committee, has been named head team physician for the Predators.

"He comes to us highly regarded … and we have the utmost confidence in him and his staff to give our players exceptional care this season and beyond," said David Poile, president of hockey operations for the Predators.

For its part, Saint Thomas Health Services remains the official health-care provider of the National Football League's Tennessee Titans.

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