California city's drastic foreclosure remedy: Seizure

Richmond Mayor Gayle McLaughlin said the city is "stepping into the void with a local principal reduction program" after other attempts to stem foreclosures failed.

NEW YORK (CNNMoney)

As a first step, the San Francisco Bay city said it will work with an investment firm to try to purchase mortgages of underwater homeowners at a price well below their current balances. It would then try to get those loans restructured to make them affordable.

But if the holders of the loans, who are mostly investors, refuse to sell by Aug. 14, the city said it will invoke eminent domain to seize the mortgages so it has more control over the process of making them affordable.

Eminent domain is the legal principle that lets government entities purchase land or structures, usually from reluctant owners who don't want to sell. It is typically invoked for public uses such as parks, roads or utilities -- not mortgages.

In the case of Richmond, the city argues that eminent domain is in the public interest because it could let people stay in their homes and help keep neighborhoods, especially minority communities and low-income neighborhoods, from fraying.

"After years of waiting for a comprehensive fix, we're stepping into the void with a local principal reduction program," said Gayle McLaughlin, mayor of Richmond.

The idea is controversial and reflects the frustration, seven years after the housing market started to collapse, of homeowners and officials in areas that are still reeling.

The Richmond plan was proposed by a private backer, Mortgage Resolution Partners, which will find the money the city needs to buy the mortgages. It stands to profit by taking a cut when the loans are refinanced.

Related: Borrowers in Obama's housing program re-defaulting, watchdog says

There's no question the housing meltdown has thwacked Richmond.

The median home price peaked at about $460,000 in early 2006, according to real estate website Zillow. Today, it is $206,000.

That means a family that purchased at the top of the market could still owe twice the current value of its home.

The idea of invoking eminent domain has been considered but rejected by other localities, including Chicago and San Bernardino, another California city hit hard by the real estate collapse.

Related: 10 great foreclosure deals

Richmond's efforts are likely to draw court challenges from investors and others who hold the current mortgages and stand to lose financially, experts said.

And banks could be scared off lending to homeowners in Richmond in the future.

"Eminent domain refinancing may offer temporary benefits to underwater borrowers in specific markets, but there will be longer-term harm as lenders are likely to pull out of those markets and mortgage financing costs across the board are likely to rise," said Jaret Seiberg, a banking analyst at Guggenheim Partners.

Richmond homeowner Morris LeGrande, however, said the city is already paying a big price for the severely underwater mortgages.

Borrowers paying off bloated loans have less money to spend at businesses in town. And the homes lost to foreclosure can blight entire neighborhoods, lower property values for every homeowner and contribute to crime.

"We want the city to purchase the loans at fair market value so we can manage our lives more effectively and economically," he said.

First Published: July 30, 2013: 2:28 PM ET

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More ho-hum economic growth ahead

NEW YORK (CNNMoney)

Economists surveyed by CNNMoney are forecasting that growth slowed to 1.2% in the second quarter. That would be even worse than the already modest 1.8% gain in the first three months of the year.

Four of the 18 economists who responded expect growth to fall below 1%, while only two expect it to be faster than the first quarter's anemic gain.

That would make three straight quarters of what most would consider an economy performing below potential, despite a rebounding housing market. Worries about cutbacks in federal spending, known as the sequester, and higher taxes that went into effect at the start of the year are the biggest headwinds for the struggling economy, the survey showed.

"The economy has shown some animal spirits in housing and new car demand, but still faces headwinds, not the least of which is mandated spending cuts," said David Nice of Mesirow Financial.

But the news isn't all bad. The economists think better growth is ahead. For the full year, they expect growth of 2%, despite the sluggish first half, and 3% in 2014.

The report on second quarter growth, which will be released Wednesday, will also be the first to implement a new measure of the U.S. economy. The Commerce Department will now factor in additional services -- such as research and development and the production of artistic properties -- which should increase the size of the entire economy. The expanded methodology will apply to previous quarters, and is not likely to have a major effect on the rate of growth.

Related: Why the housing market could grow even if economy slows

The recovery in the long suffering housing market will be a major driver of better growth ahead. Fueled by record low mortgage rates and a drop in foreclosures, major housing indicators like home prices, home building and home sales have all been rebounding throughout 2013. The recent rise in mortgage rates might slow the pace of recovery, but not enough to kill off the rebound entirely, the economists said. And despite a 12.2% jump in home prices over the last 12 months, few of the respondents are worried about the threat of a new housing bubble.

"Home prices are recovering at a 'Goldilocks' pace that should enable the sector to extend its recovery out over many years," said Russell Price of Ameriprise Financial. "There is a very healthy dynamic in our view as it should enable the sector to avoid too rapid a rebound and thus the risk of another boom and bust."

The economists are a bit more bullish about Friday's report on job growth. They predict employers added 180,000 jobs in July, down only slightly from the 195,000 gain in June. They expect that to trim the unemployment rate to 7.5% from 7.6% in June.

First Published: July 30, 2013: 3:12 PM ET

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Government shutdown won't shut Obamacare: Report

A federal shutdown wouldn't stop Obamacare, report says.

WASHINGTON (CNNMoney)

The new health care law draws funding from sources that are not subject to the congressional budget process, according to the nonpartisan Congressional Research Service. Also, the revenue collected under Obamacare is considered to be part of a category that ensures the "safety of human life or the protection of property," which makes it immune to government shutdowns, the report said.

Related: Who loses out under Obamacare

The report is significant because Republican lawmakers have been talking about opposing any measure to keep government running, if it means also funding Obamacare.

The current bill funding the government runs out on Sept. 30.

The expectation is that Congress will do what it has done in recent years: pass a temporary funding bill by Sept. 30 to prevent a government shutdown on Oct. 1, the first day of fiscal 2014.

Some Republicans are demanding that the 2014 budget withhold funding for Obamacare. The Senate and President Obama would not agree to such a budget, which could lead to a government shutdown.

"We have the potential to show real leadership -- and stand together and actually defund (Obamacare)," said Texas Republican Sen. Ted Cruz. "Republicans will be blamed for a government shutdown. . . but I think (the House) should fund the entirety of the federal government -- except Obamacare."

However, the congressional report underscores that shutting down the government will do little to stop Obamacare.

The Affordable Care Act was passed in 2010, with the goal of expanding health care coverage and affordability to millions by various mechanisms, including subsidies, mandates and setting up health care exchanges for the uninsured.

Obama economy speeches come ahead of budget battle

Obamacare has lately been in the spotlight, as it gets closer to taking full effect. States are setting up health exchanges for people to buy insurance. The individual mandate, which requires taxpayers to buy insurance or pay a government fine, takes effect Jan. 1. The mandate forcing employers was delayed by a year to 2015, allowing businesses more time to provide their workers with health insurance.

Not all Republicans want to shut down the federal government over Obamacare.

Sen. Tom Coburn, an Oklahoma Republican said on Tuesday that while he wants to defund Obamacare, threatening a government shutdown isn't the best way to end Obamacare, citing the new congressional report.

"I praise my colleagues in what they're trying to do," Coburn said. "What we need to do is delay (Obamacare) and get it to a point where we can kill it."

President Obama on Tuesday criticized Republicans in Congress who would "hurt a fragile recovery by suggesting they wouldn't pay the very bills Congress rang up, and threaten to shut down the people's government if they can't shut down Obamacare."

--CNN's Ted Barrett and Deirdre Walsh contributed to this report.

First Published: July 30, 2013: 5:31 PM ET

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Tax reform secrecy plan blasted

A 50-year cloak of confidentiality is "far longer than presidential records are sealed," 30 groups wrote, urging the Senate Finance Committee to make proposals public in real time.

NEW YORK (CNNMoney)

Thirty organizations urged the Senate Finance Committee in a letter to make all tax reform correspondence public in real time.

The committee has said that senators can propose which tax breaks they think should be retained without fear their views will be made public until Dec. 31, 2064.

A 50-year cloak of confidentiality is "far longer than presidential records are sealed," the groups said in their July 26 letter.

"[T]ransparency is essential for your final product to have credibility with the public rather than feed cynicism. Taxpayers across the United States have a right to know what their elected officials are advocating and what their justification," the letter said.

The letter was signed by Taxpayers for Common Sense, the Center for Effective Government, the American Sustainable Business Council and the Fund for Constitutional Government, among others.

Quiz: What do you really know about the tax code?

Christopher Bergin, president and publisher of Tax Analysts, which also signed the letter, put it more bluntly.

"[W]hile it may not be secret law, it gets a little close to making law in secret. I realize it may be a novel idea to argue that the people have the right to know what groups their lawmakers think should get favors from their tax laws, but it's a good idea," Bergin wrote in a blog post.

Some CNNMoney readers, reacting to news coverage last week, were not pleased.

"If a politician believes in a tax break they should have to stand for it publicly. If they can't do that, then they clearly shouldn't be supporting it to begin with," one reader wrote.

Others were more sympathetic to the idea that lawmakers might need some protection to discuss unpopular proposals, just not 50 years' worth.

"We are likely to get a better tax code out of something like this, but 50 years? Come on, it should be more like 12. You get two more terms without losing your job if you did something your [constituents] would've found distasteful ... not a life pardon," another wrote.

And not everyone is necessarily going to take advantage of the committee's offer for a half century of confidentiality.

Some lawmakers -- including retiring senator Jay D. Rockefeller, a Democrat from West Virginia, and Sen. Mike Enzi, a Republican from Wyoming -- have posted their recommendations on their own Web sites.

First Published: July 29, 2013: 1:23 PM ET

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Regulators accuse JPMorgan of manipulating electricity markets

In an official notice, the Federal Energy Regulatory Commission alleged that the bank had engaged in "eight manipulative bidding strategies" in California and Midwestern markets.

NEW YORK (CNNMoney)

In an official notice, the Federal Energy Regulatory Commission alleged that the bank had engaged in "eight manipulative bidding strategies" in California and Midwestern markets.

The strategies led to payments to JPMorgan "of tens of millions of dollars at rates far above market prices," according to the notice. JPMorgan is expected to pay a massive fine related to the allegations.

Related: Are big banks driving up commodity prices?

The strategies allegedly worked like this. In California, for example, the bank would bid to deliver electricity to a utility the next day at a low price of $30 per megawatt hour. When the next day came, JPMorgan would change its offer to a much higher price of $999 per megawatt hour, assuring the power did not get bought, according to the notice.

California ISO, the state's power-grid operator, would then have to compensate the bank for the cost of making the bid, under California's "make whole provision," which requires ratepayers to cover certain costs incurred by energy sellers.

JPMorgan employed a similar strategy in the Midwest, according to the notice.

JPMorgan and FERC both declined to comment.

FERC also recently fined British bank Barclays and Deutsche Bank for other improprieties involving the sale of power.

First Published: July 29, 2013: 6:40 PM ET

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CBS/Time Warner Cable talks go down to the wire

Summer hit "Under the Dome" is one of many shows some Time Warner Cable customers would lose access to if a deal isn't reached.

NEW YORK (CNNMoney)

The companies have been battling in recent weeks over the "transmission fee" that Time Warner Cable pays to run CBS-owned stations, including network affiliates in major cities like New York and Los Angeles, and CBS-owned pay channel Showtime, according to the cable provider.

CBS (CBS, Fortune 500) has threatened to yank its programming from Time Warner Cable (TWC, Fortune 500) customers in New York, Los Angeles and Dallas if an agreement is not reached. It could also potentially affect Time Warner Cable's Showtime subscribers across the country, according to Time Warner Cable spokeswoman Maureen Huff.

The companies extended the deadline for talks several times Monday evening, with both parties staying at the negotiating table well into the night.

Related: The 6 longest TV blackout wars

Huff said that negotiations remained "ongoing and active." CBS declined to comment beyond a statement that the deadline had been extended while negotiations continued.

If the two companies don't reach an agreement, Time Warner Cable customers could be blocked from viewing CBS programs, including hit shows like "NCIS," "The Big Bang Theory" and this summer's "Under the Dome."

Although TV networks tend to attract fewer viewers in the summer season, "Under the Dome" has topped the ratings list, attracting more viewers than any other show last Monday night.

CBS has been running TV commercials warning customers in the affected cities that "Time Warner Cable is threatening to hold your favorite shows hostage."

In response, Time Warner Cable has claimed that CBS is demanding too high a rate -- 600% more than what the cable provider has to pay for the network's programming in other parts of the country. In those areas, Time Warner Cable negotiates with local CBS affiliates that are not owned outright by the network.

CNNMoney's Katie Lobosco contributed to this report.

First Published: July 29, 2013: 5:38 PM ET

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Stocks: All eyes on jobs

Click the chart for more stock market data.

NEW YORK (CNNMoney)

A look at labor: Several key reports on the nation's employment picture are due out throughout the week, including ADP's snapshot on employee payrolls and Challenger's job cuts.

The main event comes Friday, when the labor department releases its monthly jobs report and unemployment rate.

Economists surveyed by Briefing.com are expecting the number of nonfarm payrolls to have decreased to 175,000 in July from 195,000 a month earlier, and the unemployment rate to fall to 7.5% from 7.6%.

Related: The government wants SAC Capital's billions

The numbers are likely to be scrutinized by investors even more closely than usual, coming close on the heels of signals from the Federal Reserve that it will start pulling back on stimulus measures if the economy improves. Recently, Federal Reserve chairman Ben Bernanke has said the central bank could start tapering its bond purchases by the end of the year.

Other economic news: Beyond the jobs report, investors will digest an advance estimate on second quarter gross domestic product, which is due out Wednesday, as is the Federal Open Market Committee's decision on interest rates.

Auto sales, consumer confidence, the Case-Shiller 20 city index, pending home sales, and personal income and spending are also on tap.

More earnings: A few major companies are also set to report earnings this week, including Herbalife (HLF), Sprint (JZK) and Exxon Mobil. (XOM, Fortune 500)

Last week, the Dow Jones Industrial Average and the Nasdaq ended higher, while the S&P 500 was little changed.

First Published: July 28, 2013: 11:57 AM ET

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Omnicom, Publicis to form world's largest ad agency

NEW YORK (CNNMoney)

The newly combined agency, Publicis Omnicom Group, would have a stock market value of $35.1 billion and 130,000 employees worldwide.

Publicis, based in Paris, and Omnicom (OMC, Fortune 500), based in New York, together brought in revenue totaling $22.7 billion last year.

Chief executives Maurice Lévy of Publicis and John Wren of Omnicom will act as co-CEOs for the next 30 months, after which Lévy will become non-executive chairman and Wren the CEO.

Related: JPMorgan to exit commodities business.

Shareholders will each hold about 50% of the equity of the agency, which is expected to be listed on the NYSE and Euronext Paris under the symbol OMC. It will be traded on the S&P 500 and CAC 40.

Publicis Groupe shareholders will receive one newly-issued ordinary share of the agency for each Pubicis share they already own, with a special dividend of €1.00 per share.

Omnicom shareholders will get .813 newly-issued shares, with a special dividend of $2 per share.

The transaction is subject to approval by shareholders of both companies as well as government regulators. It is expected to close in the fourth quarter of 2013 or the first quarter of 2014.

First Published: July 28, 2013: 10:44 AM ET

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China and European Union strike deal on solar panels

China and the EU have reached a deal over solar panels.

HONG KONG (CNNMoney)

The deal, reached after weeks of negotiations, will allow Chinese solar panel producers to export their goods to Europe, provided they offer the products above a minimum price. Chinese companies that agree to the terms will avoid the severe tariffs that had been implemented by the EU.

EU Trade Commissioner Karel De Gucht praised the agreement as the solution that "both the EU and China were looking for."

"We have found an amicable solution that will result in a new equilibrium on the European solar panel market at a sustainable price level," he said.

The deal is not likely to please all parties. While the European Commission has not announced the full terms, media reports indicate that the minimum price for Chinese panels has been set at 74 U.S. cents per watt -- a much lower price than had been sought by European manufacturers.

De Gucht, the EU trade chief, is bound to face questions from producers over the price minimum. He must also move to patch up fissures between EU member countries -- some of which had publicly questioned the wisdom of taking China to task over solar panels.

The agreement still needs approval from the European Commission.

The deal should cool tensions between China and the EU, which had been engaged in tit-for-tat retaliatory actions that raised the specter of a trade war.

Related story: China and Europe risk trade war

In recent months, China had launched investigations into European wine and chemical producers. The EU, meanwhile, said in May that it had enough evidence to begin an investigation into Chinese telecoms.

A full-blown trade spat would have resulted in profound consequences for both economies. China is the EU's second biggest trading partner behind the United States, and the EU is China's biggest market. Trade in goods and services between the two totaled nearly 480 billion euros ($638 billion) last year.

The solar panel issue had been by far the most contentious dispute, covering Chinese exports worth about 21 billion euros ($28 billion).

Analysts will now looking for concrete signs that the relationship is on the mend. It's possible, for example, that China will halt its investigation into European wine prices.

Related story: China, OPEC and the future of energy

The trade spat between China and the EU was playing out against an evolving trade landscape, with China, the United States and other countries jockeying for power in Asia.

A slew of trade agreements are currently being negotiated, with the United States working toward the Trans-Pacific Partnership, a pact that many analysts in China view as a hedge against growing Chinese influence.

At the same time, China is pursuing its own objectives and increasing its engagement with international trade arbiters.

First Published: July 29, 2013: 12:35 AM ET

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The government wants SAC Capital's billions

Steven Cohen's hedge fund SAC Capital was indicted for criminal insider trading.

NEW YORK (CNNMoney)

The U.S. Attorney for Southern District of New York's filing Thursday of civil and criminal charges against Cohen's hedge fund opens the door for the government to seek significant penalties.

"A criminal conviction would forever taint SAC and Steven Cohen, but ultimately the big financial penalties could come from the civil case," said John Coffee, a professor of securities law at Columbia University.

So far Cohen has escaped criminal charges and, as of now, faces no possibility of jail time.

The real penalty now could be a financial blow to the hedge fund manager, whose personal fortune is estimated at roughly $9 billion.

SAC Capital at its height had $15 billion in assets under management. This year, as the government's investigation expanded, up to $5 billion has been withdrawn from the firm, according to published reports. The majority of the firm's money comes from Cohen.

Several securities lawyers said the scope of the government's civil indictment indicate that prosecutors might try to go after all of the firm's assets.

Related: SAC indictment depicts culture of law-breaking

The government gets to that demand by painting a picture of rampant insider trading at a fund where "hundreds of millions of illegal profits" from insider trading were "commingled" with legitimate profits. The government is seeking not just the illegal profits but even legal profits that may have been generated from that money.

The 40-page civil indictment outlines how these profits infiltrate every level of the firm.

"I don't know how easy it will be to prove, but it may be frightening enough to get SAC to seek a settlement," said Coffee.

On Friday, SAC Capital's lawyers pleaded not guilty to the federal criminal charges against the hedge fund. SAC Capital said Thursday that it plans to continue to operate as it works through these matters.

Both SAC and Cohen face fines from several different lawsuits, but the civil penalties sought by the U.S. Attorney's Office are expected to be steepest. The government said the actual figure will be determined at trial, and U.S. Attorney Preet Bharara declined to comment on possible penalties during a news conference Thursday.

Related: Not guilty plea entered by SAC Capital

The government can also seek penalties from its criminal case, but the maximum penalty for each count of securities fraud is $25 million. SAC has been indicted on four counts of securities fraud.

The hedge fund was also indicted on a charge of wire fraud. In that case, the government can seek twice the gains or losses generated from illegal trades.

The indictment only specifies profits from one set of trades in the pharmaceutical companies Elan (ELN) and Wyeth in 2008 and 2009. The profit from those trades was approximately $275 million.

In a separate case against Cohen, the SEC is seeking financial penalties for what it says is a failure to supervise employees engaged in insider trading. Coffee estimates that any penalties from the SEC case would be smaller than those possible in the U.S. Attorney's case.

The SEC has already extracted one penalty from SAC. In March, the firm paid $615 million to the agency to settle insider trading charges.

Bharara has said that the government wants to extract meaningful penalties so this case and other insider trading cases can have a deterrent effect.

First Published: July 26, 2013: 4:27 PM ET

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JPMorgan to exit commodities businesses

NEW YORK (CNNMoney)

The announcement comes as the bank reportedly nears a settlement with the U.S. government over the manipulation of electricity markets in California.

JPMorgan (JPM, Fortune 500)said it "is pursuing strategic alternatives for its physical commodities business...including, but not limited to: a sale, spin off or strategic partnership."

The move will not affect the bank's trading activities, such as the buying or selling of futures contracts.

Earlier this week, the Senate held a hearing on bank ownership of physical commodities, during which several witnesses said involvement from the big banks is dangerous for the financial system and may be driving up prices for consumers.

The hearing followed a story in the New York Times on Sunday alleging Goldman Sachs (GS, Fortune 500) was stockpiling aluminum in Detroit, leading to higher prices for aluminum products like soda cans and cars.

People familiar with JPMorgan's involvement in California's electricity markets say the bank would bid to deliver electricity to a utility on a future day, and then raise the price, ensuring the power would not get bought.

Consumers would then have to compensate the bank for the cost of making the bid, under California's "make whole provision," which requires ratepayers to cover certain costs incurred by energy sellers.

It's not clear how JPMorgan made money on this arrangement, or if it was technically legal.

The government agency charged with policing electricity markets -- the Federal Energy Regulatory Commission -- and JPMorgan have declined to comment on the case.

Barclays and Deutsche Bank (DB) have also been recently fined by the government for improper electricity trading.

First Published: July 26, 2013: 5:51 PM ET

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Starbucks sees big growth in China

Starbucks is opening more stores in inland Chinese cities, such as this one in Chengdu, Sichuan Province in Southwest China.

NEW YORK (CNNMoney)

According to its latest quarterly report, Starbucks (SBUX, Fortune 500) saw a 30% year-over-year jump in revenues from its Asia-Pacific region, lifted by outstanding sales in China.

"The very strong sales volumes prove that the coffee concept can succeed in traditional tea-drinking countries," said R J Hottovy, director of consumer equity research at Morningstar, Inc. "It's resonating very well with [inland] cities."

Starbucks' solid sales growth in the region was driven by the 500 new stores it opened in China last year, and its Chinese expansion plans aren't slowing down.

The Seattle-based coffee giant said it plans to open its thousandth store in China by the end the year. In addition to already being in major cities like Beijing and Shanghai, the company says its stores will have penetrated lesser-known cities. By 2014, Starbucks said China will surpass Canada to become the second largest market, after the United States.

Related: Starbucks' caffeine-fueled expansion

In the last five years, overall retail coffee sales in China climbed by 10%, beating growth in Hong Kong, Japan and the 3% global average, according to data from research company Euromonitor International.

Starbucks said its marketing strategy in China is similar to that of its Western markets. It continues to focus on its core food and beverage products while also offering other locally oriented choices.

"The demographics they are targeting are younger and more affluent groups," Hottovy said.

Starbucks opened its first store in Taipei in 1998, followed by its first mainland China store in Beijing in 1999. But the coffee shop market is beginning to heat up. "Increasing competition will be the most pressing issue as more Western coffee brands enter the Chinese market," he said.

In 2012, an average Chinese person consumed about two cups of coffee per year. That's a far cry from the global average of 134 cups a year, according to Euromonitor. Coffee has less than 1% of the Chinese hot-drink market share. By contrast, tea makes up 54% of the market.

"It's still too early to say that coffee is going to replace tea, or that the Chinese flavor profile is changing," said Dana LaMendola, analyst of hot drinks at Euromonitor.

First Published: July 26, 2013: 6:24 PM ET

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The unknown future of SAC and billionaire Steve Cohen

NEW YORK (CNNMoney)

But the future of SAC Capital is less clear.

In an indictment of Cohen's hedge fund, federal prosecutors described a criminal insider trading network "that was substantial, pervasive and on a scale without precedent in the hedge fund industry."

But Cohen wasn't personally charged by the U.S. Attorney's Office.

The criminal indictment comes just one week after the SEC charged Cohen with failing to supervise employees who engaged in insider trading. The SEC is seeking to ban him from the securities industry.

Related: SAC Capital hit with criminal charges

In a statement issued Thursday afternoon, SAC said it "will continue to operate as we work through these matters."

What isn't clear is what would happen to SAC if the firm is found guilty.

SAC itself may be forced to close its doors to outside investors, but the majority of the fund's assets are Cohen's. The fund has already seen a broad exodus of investor money.

Several securities lawyers said that Cohen could continue to manage his own money, even if he is banned from the securities industry.

They also say he'd be permitted to retain a staff to help him. It's not clear how many of his roughly 1,000 employees would be needed. Additionally, they said banks could continue to legally do business with SAC but it's unclear whether firms would even want to

SAC Capital uses five investment banks to clear its trades: Morgan Stanley (MS, Fortune 500), JPMorgan (JPM, Fortune 500), Credit Suisse (CS), Barclays (BCS), and Goldman Sachs (GS ). All the banks declined to comment about whether they would continue to work with SAC.

Commissions from executing trades can be lucrative. But they must weigh the reputational risks and the possibility of lawsuits from investors or regulators, said Ron Geffner, a hedge fund lawyer with Sadis and Goldberg.

Related: 5 signs Cohen was trading on insider information

For Cohen, there's the question of whether the government will try to take away the majority of his fortune.

So far, the penalties have been relatively modest. SAC paid $614 million to the SEC in March. But the SEC is seeking unspecified further fines in its civil case against Cohen.

The U.S. Attorney for the Southern District of New York, Preet Bharara, also declined to specify the size of the profits they want SAC to forfeit. In the indictment, they said SAC's actions resulted in "hundreds of millions of dollars of illegal profits."

Dan Richman, a professor at Columbia Law School, said the U.S. Attorney's office has painted a "broad picture" of how SAC generated profits from illegal activity, which may in turn cause the government to seek big penalties. "They're seeking not just the profits of criminal activity, but the profits from those proceeds too," said Richman.

After the SEC forced SAC to pay up in March, Cohen spent $155 million on a Pablo Picasso painting.

For the most part, Cohen has tried to stay out of the limelight, but he has not been shy about spending his billions on art, real estate and philanthropy. In addition to his recent Picasso, his art collection includes works from Andy Warhol, Willem de Kooning, and Jeff Koons. He serves on the board of the Museum of Contemporary Art in Los Angeles.

During a press conference Thursday, Bharara declined to comment on future charges for Cohen, but Columbia Law School's Richman said that the U.S. Attorney's indictment cited several trades from 2010 and 2011. That document, he said, shows that the door could still be open for criminal charges against the hedge fund manager.

Cohen is scheduled to appear before an administrative judge at the SEC on August 26.

-- CNNMoney's James O'Toole and Chris Isidore contributed to this report.

First Published: July 25, 2013: 4:57 PM ET

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CBO: Cancel spending cuts now, boost economy in short run

Canceling budget cuts would help the economy over the next year and a half but could weigh on the long run unless savings are replaced.

NEW YORK (CNNMoney)

Canceling the cuts by Aug. 1 -- a move no one expects lawmakers to make -- would increase federal spending by an estimated $14 billion through the end of September, and by another $90 billion in fiscal year 2014, which starts Oct. 1.

Those increased outlays, in turn, could push up inflation-adjusted economic growth by 0.7% and increase employment by 900,000 jobs in the third quarter of 2014. Both numbers fall in the middle of CBO's estimated ranges for growth and jobs.

Barring other changes, however, there are potential downsides to canceling the sequester.

Related: Bernanke: Congress still a risk to economy

"Although output would be greater and employment higher in the next few years if the spending reductions ... were reversed, that policy would lead to greater federal debt, which would eventually reduce the nation's output and income below what would occur," the CBO said.

The agency's analysis was done at the behest of Chris Van Hollen, the top Democrat on the House Budget Committee.

Democrats have been pushing to cancel the sequester and replace its savings with longer term spending reductions and increased revenue.

More revenue is a nonstarter for Republicans, who want to preserve the spending caps that the sequester calls for beyond 2013. They do, however, want to restore the funding cuts made to defense and compensate by increasing the cuts to domestic programs, which is a nonstarter for Democrats.

That helps explain why lawmakers have yet to bridge the $91 billion gap between the parties' proposed budgets for the next fiscal year, and sets them up for a tough fight this fall.

The effects of the sequester, to date, have been uneven both regionally and across different sectors of the economy. What's more, its economic impact has been hard to measure definitively since it is still unfolding. For instance, the furloughing of 650,000 Department of Defense employees just began this month. But most economists believe it is and will continue to have a dampening effect.

First Published: July 25, 2013: 6:14 PM ET

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Samsung's record profit isn't good enough

The Samsung Galaxy S4 has sold well, but analysts worry the market might be saturated.

HONG KONG (CNNMoney)

Samsung is learning that difficult lesson Friday after reporting a record profit that nonetheless fell short of investor expectations.

The South Korea-based smartphone maker reported net profit of 7.8 trillion won ($7 billion) in the second quarter. Even though that figure was a 50% increase over the previous year, it fell short of analyst expectations of 8 trillion won.

Samsung shares declined slightly after the earnings report was released. So far this year, shares have lost 14% of their value.

Investors and analysts remain worried about slowing demand for top-shelf smartphones like the Samsung Galaxy S4. The phone, which competes with Apple's iPhone and HTC's One, has sold well.

But the future profitability of the device remains a question -- and Samsung's legacy businesses in television and electronics production don't appear poised to pick up the slack.

Related story: Want to invest in Samsung? Good luck!

The problem is not unique to Samsung. Apple's (AAPL, Fortune 500) iPhones have also been selling well, but growth has slowed and investors have punished the stock lately.

BlackBerry (BBRY) has also struggled to gain traction with its new Z10 smartphone, and its stock has plummeted.

Related story: Samsung and HTC smartphone momentum comes to screeching halt

Now that Samsung is mirroring that trend, industry analysts believe that the top tier of the market is becoming saturated.

Apple is rumored to be creating a lower-end version of its smartphone to expand its share and better compete with No. 1 Samsung, whose phones run on the Android operating system from Google.

First Published: July 25, 2013: 11:21 PM ET

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Student loan deal passes Senate

Students heading to college this fall will see loan rates drop under a deal the Senate approved on Wednesday, but future college students may have to pay more.

WASHINGTON (CNNMoney)

Senators voted 81 to 18 to lower interest rates for undergraduates taking out government loans this school year to 3.86% -- cheaper than the 6.8% interest rate that kicked in on July 1. The new rates would be retroactive and apply to loans taken out after July 1.

However, the bill has provisions for rates to go higher in coming years. It is expected to become law, with support from the White House and the House of Representatives, which will likely take up the bill in coming days.

"This fall, all undergraduates, subsidized or unsubsidized, would only have to pay 3.86% interest rate for the life of the loan," said Sen. Tom Harkin, an Iowa Democrat, whose support was key to a Washington deal. "That means real savings for borrowers."

It doesn't apply to loans that students get from private lenders. It only affects Stafford loans, which are made by the U.S. government to help finance a college education. Students can apply through their university financial aid office. The loans are limited to no more than $5,500, for a mix of subsidized and unsubsidized loans for the freshmen year and $7,500 for juniors and above.

On July 1, the interest rate on subsidized Stafford loans doubled from 3.4% to 6.8%. The rate hike affected 7.4 million students. The subsidized government student loans are based on financial need and account for about 26% of all federal student loans, according to the Congressional Budget Office.

Unsubsidized loans and graduate loans were already paying 6.8% interest rates.

The latest bill helps all students.

The basic principle is that it ties student loan rates to the bond markets.

This fall, undergraduate students will pay an overall interest rate of 3.86% on their loans. It is comprised of the yield on the 10-year Treasury note on June 1, plus an additional 2.05%. Graduate students will have to pay 5.41% on loans this fall, or 3.6% over the 10-year Treasury, also on June 1.

Related: Bill helps college students now, but future students to see rate hikes

If rates on Treasury notes rise, so would student loan rates under the new deal.

However, if interest rates were to spike, the bill makes provisions to cap the rates. Loans for undergraduates will be capped at 8.25% and for graduates at 9.5%.

Over 10 years, the interest rates the government collects on student loans is expected to raise $715 million. It will go toward reducing deficits.

The bill won support from Senate Republicans. However, left-leaning Democrats and student groups opposed the bill for hiking rates in coming years.

"The truth of the matter is the bill on the floor would be a disaster for the young people of our country who are looking to go to college," said Sen. Bernie Sanders, a Vermont Independent who opposed the bill. "This makes a bad situation worse."

Under the deal, high school students, like Dakota Friend, 16, could be paying more for student loans when she attends college. However, it will benefit her sister, Briana Mullen, who is currently a rising junior at University of California, Berkeley.

"It doesn't seem fair," Dakota Friend said. "I don't understand why she (my sister) gets the more affordable loans than I do."

President Obama has been pushing for the deal. Education Secretary Arne Duncan said Tuesday that he was "really pleased that Congress is coming together to keep college student loans rate low."

Related: Student loan horror stories

Student loan debt has skyrocketed in recent years, as have delinquencies, making it a pressing political and financial issue for millions of Americans. Many students graduate from college deep in debt and without jobs. It is second only to mortgages as the largest debt that consumers carry. In 2011, students on average owed nearly $27,000 in loans.

-- CNN's Ted Barrett and Deirdre Walsh contributed to this piece.

First Published: July 24, 2013: 6:35 PM ET

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Federal judge blocks challenges to Detroit bankruptcy

NEW YORK (CNNMoney)

Detroit became the largest municipal bankruptcy filing in the nation's history last week after a filing by state-appointed emergency manager Kevyn Orr. Orr and Michigan Gov. Rick Snyder said the city cannot afford its $11.5 billion in liabilities associated with pension benefits, retiree health care and unsecured debt held by investors.

Retirees and their pension funds quickly sued to block the bankruptcy filing, claiming it violated Michigan's state constitution. A county judge ruled in favor of the retirees last week, though the Michigan Court of Appeals reversed that ruling.

Related: After Detroit bankruptcy, then what?

On Wednesday, Federal Bankruptcy Judge Steven Rhodes ruled that jurisdiction over the case rests in federal and not state court, court spokesman Rod Hansen said.

Rhodes has yet to rule on the merits of the case and whether Detroit is eligible for bankruptcy, a decision he will make following arguments in the weeks to come. For the time being, however, all challenges to the filing have been put on hold.

The American Federation of State, County and Municipal Employees, a union representing public-sector workers, said in response that the court "missed an important opportunity to stop Governor Snyder and Kevyn Orr's constitutional breach now by deferring the argument to a future date."

"The fight is not over and we will continue to stand up for Detroit's workers every step of the way," AFSCME president Lee Saunders said in a statement.

The next hearing in the case will be a scheduling conference on August 2.

First Published: July 24, 2013: 6:26 PM ET

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Facebook shares soar on strong earnings

Facebook quarterly profit and sales exceed Wall Street's expectations, sending stock soaring in after hours trading.

NEW YORK (CNNMoney)

Facebook reported second-quarter revenue of $1.8 billion Wednesday, exceeding analysts' expectations of $1.6 billion.

Net income rose to $333 million, compared to a loss of $157 million a year ago.

The stock jumped to more than $30 per share in after-hours trading, a price not reached since January. Facebook's stock has never returned to its May 2012 IPO price of $38 per share.

One big reason for Wednesday's surge: The number of people using Facebook on a mobile phones or tablets increased by 51% to 819 million, year-over-year.

And the company said that mobile continues to make up a larger share of Facebook's (FB) overall advertising business.

Mobile ad sales accounted for 41% of Facebook's total ad revenue. Last quarter, that share was just 30%.

"When it comes to mobile, I'm very pleased with our results," said CEO Mark Zuckerberg on a conference call with investors.

At the time of the IPO, analysts said the company's lack of mobile revenue was a major downside to the stock and a reason for its sharp drop in price.

Facebook said its monthly active users increased to 1.15 billion, up 21% year-over-year. Executives are expecting Facebook to continue to grow in both number of users and revenue.

"I'm optimistic about growth across Asia and the rest of the world," said COO Sheryl Sandberg on the conference call.

The company's recent launch of "Facebook for Every Phone" allows people in developing countries to access Facebook on their phones, even if they do not have a smartphone. There are currently 100 million people using the new app each month.

"There's nothing magical about reaching a billion users," said Zuckerberg, noting that it was a great initial target, one that was surpassed in the fall of last year. "The real goal is to connect everyone in the world."

First Published: July 24, 2013: 4:54 PM ET

12.08 | 0 komentar | Read More

Apple profit falls 22% but beats gloomy expectations

NEW YORK (CNNMoney)

The company sold 31.2 million iPhones last quarter -- a number practically no one saw coming -- lifting Apple's overall sales and helping Apple's profit surpass some pretty gloomy expectations from Wall Street analysts.

That's not to say Apple had a great past quarter. Profit sank 22% and sales were up less than 1%. That's a nasty development for a company that was regularly posting startup-like profit and sales growth as recently as a year ago. But no one expected Apple to report anything close to that last quarter.

Shares of Apple (AAPL, Fortune 500) rose 4% after hours, as investors reveled in a rare bit of good news for the company. Apple's stock has taken a beating over the past 10 months, falling 40% since reaching an alll-time high in September.

Related story: Game over or room to grow for Apple?

The company's iPhone sales, up 20% from a year ago, easily beat Wall Street's expectations of about 26 million. CEO Tim Cook said he believes this past quarter is evidence that the obituaries written for growth in the high-end smartphone market are premature. Cook said the latest-edition iPhone 5 remains the best-selling iPhone "by far."

Another unexpected bright note: Apple's iTunes sales grew by 29% last quarter -- a business that now accounts for nearly 7% of Apple's overall sales.

But Apple sold just 14.6 million iPads, down 14% from a year ago, when the company released the third-generation iPad. It also sold 3.8 million Macs, down 5% from a year earlier, though the overall PC market contracted by about twice that rate. Still, Mac sales fell short of analysts' forecasts -- and iPad badly underperformed expectations.

The company also said its current quarter won't be as strong as Wall Street had expected. Apple anticipates producing sales of between $34 billion and $37 billion this quarter, below analysts' median forecast of just over $37 billion.

The growing mix of older and cheaper products, including the iPhone 4 and iPad mini, continue to weigh on the company's profit. Apple said it expects gross margin to come in between 36% and 37% this quarter. If that holds true, this would mark the seventh straight quarter in which gross margins have fallen.

Yet Cook said he was encouraged by the company's better-than-expected quarter, and he continued his optimistic view of the company's future.

"We are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014," he said, in a prepared statement. Peter Oppenheimer, Apple's chief financial officer, said the company will have "a very busy fall," though he declined to elaborate.

By the numbers: The tech giant said net income in its fiscal third quarter fell to $6.9 billion, or $7.47 per share. Analysts polled by Thomson Reuters forecast earnings of $7.32 per share. Apple's gross margin of 36.9% also came in slightly ahead of analysts' expectations, but that fell from 42.8% a year ago.

Sales for the Cupertino, Calif.-based company rose to $35.3 billion, topping analysts' forecasts of $35 billion.

Apple ended the quarter with $146.6 billion in cash -- $106 billion of which is being held overseas.

First Published: July 23, 2013: 4:54 PM ET

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Factory output puts brakes on China's growth

HONG KONG (CNNMoney)

HSBC said Wednesday that its "flash" index of manufacturing purchasing managers' sentiment fell to a eleven-month low of 47.7 in July, as new export orders slowed and output fell.

Slower growth in China's vast manufacturing sector, seen as an economic bellwether, could raise pressure on the country's policymakers to step in with stimulus measures.

"The lower reading of the July HSBC Flash China Manufacturing PMI suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking," said HSBC chief China economist Hongbin Qu.

The factory slowdown is a major headache for policymakers in Beijing.

Earlier this month, the government reported that GDP slowed to 7.5% in the second quarter. Expansion at that pace would make most countries green with envy, but was among the slowest rates China has reported in the past two decades.

Related story: Economic slowdown tests China's leaders

China has more typically averaged growth of around 10% a year, a level of production that has propelled it up the list of biggest economies, generated wealth for its growing middle class and boosted global trade.

But many economists now say that China's economy relies too heavily on investment, a trend that has distorted the country's housing market and placed great emphasis on exports over consumption.

President Xi Jinping and Premier Li Keqiang are by all accounts determined to proceed with reforms, even if it means tolerating slower growth for now.

The key question of the moment is just how much the economy can slow before the government intervenes in a bid to support growth.

Related story: IMF cuts world economic growth forecast

Qu, the HSBC economist, said that the latest manufacturing data indicates that the labor market is coming under pressure -- something Beijing might not be willing to tolerate for long.

"As Beijing has recently stressed, to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilize growth," Qu said.

First Published: July 23, 2013: 10:43 PM ET

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Borrowers in Obama housing program re-defaulting, watchdog says

NEW YORK (CNNMoney)

Nearly 1.2 million mortgage modifications have been completed since the Home Affordable Modification Program (HAMP) was first launched four years ago. Yet more than 306,000 borrowers have re-defaulted on their loans and more than 88,000 are at risk of following suit, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) found in its quarterly report to Congress.

In addition, the watchdog found that the longer a homeowner stays in the HAMP modification program, the more likely they are to default. Those who have been in the program since 2009, are re-defaulting at a rate of 46%, the inspector general found.

Related: Did you refinance through the Home Affordable Modification Program?

HAMP, which was launched by the Treasury Department at the height of the foreclosure crisis, aimed to help as many as 4 million borrowers avoid foreclosure by making their payments more affordable through reduced interest rates, extended loan terms or, in some cases, reduced mortgage principals.

Not only has the program fallen far short of that goal but with each year of the program, a growing number of homeowners have re-defaulted, the inspector general found.

"Treasury needs to research why so many borrowers are dropping out of the program," said Christy Romero, the head of SIGTARP.

Quiz: How smart are you about mortgages?

The inspector general said it found some "clear patterns" in its own research. Homeowners who were most likely to re-default were the ones who received the smallest reduction in their loan payments or overall debt, were still underwater on their mortgage or had subprime credit scores and high overall debt at the time the modification took place.

The Treasury is currently researching the performance of modifications under the HAMP program and working on ways to improve the re-default rates, a Treasury official said at a press conference on Tuesday.

Treasury also noted that most of the re-defaults were high risk to begin with and were inked during one of the worst financial crises since the Great Depression.

Related: Foreclosures fall to pre-housing bust level

As of April 30, taxpayers have lost some $815 million on the permanent mortgage modifications that have re-defaulted, the inspector general reported. As part of the Troubled Asset Relief Program, Treasury allocated $19.1 billion to the HAMP program. So far, it has spent $4.4 billion, the inspector general said.

Nevertheless, the government has extended the program for another two years, until the end of 2015.

To improve HAMP's performance going forward, the inspector general also suggested that Treasury work with mortgage servicers to create an early warning system that will enable it to reach out to at-risk homeowners before they default.

"Treasury pulled out all the stops for the banks, they should do the same for homeowners," said Romero.

First Published: July 24, 2013: 12:08 AM ET

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SEC charges Miami with fraud, accuses city of lying about finances

The SEC sanctioned Miami for similar conduct in 2003.

NEW YORK (CNNMoney)

The SEC said Michael Boudreaux helped falsify Miami's financial reports for the 2007 and 2008 fiscal years and lied about the city's finances in a series of 2009 bond offerings worth $153.5 million. Boudreaux allegedly orchestrated the unlawful transfer of nearly $38 million out of Miami's capital improvement fund in order to mask deficits in the city's general fund.

The SEC sanctioned Miami for similar conduct in 2003. The case marks the first time the agency has alleged repeated wrongdoing by a city subject to a previous cease-and-desist order.

Related: SEC charges hedge-fund mogul Steve Cohen

"The fact that a city official would enable these false and misleading disclosures to investors merely a few years after Miami had been reprimanded by the SEC for similar misconduct makes this repeat behavior all the more appalling and unacceptable," George Canellos, the SEC's co-director of enforcement, said in a statement.

Lawyers for Miami and Boudreaux did not immediately respond to requests for comment, nor did spokespeople for the city.

Miami was forced to reverse most of the transfers from the capital improvement fund following a report issued by a city watchdog in November 2009, the SEC said. The city subsequently declared a "state of fiscal urgency" and had its debt downgraded by ratings agencies.

The SEC also charged the state of Illinois and the city of Harrisburg, Pa. earlier this year with misrepresenting their finances to investors.

First Published: July 19, 2013: 6:21 PM ET

12.08 | 0 komentar | Read More

Be set when the Fed's help ends

When the Fed's training wheels come off and yields turn around, position yourself to take advantage of higher rates.

(Money Magazine)

Look at what happened in late May and June after chairman Ben Bernanke said the Fed would, eventually, assuming things get better, start to pare back its aggressive efforts to keep credit flowing. The rally on the Dow, which not long ago had crossed 15,000, pulled back sharply. Treasury rates jumped to a 20-month high by late June. (When yields go up, bond prices go down.)

For bond fund investors, the sell-off meant "their worst month since the Greek financial crisis," according to Lipper analyst Jeff Tjornehoj.

How can so much hang on the ambiguous words of one economist? As you'll see, the Fed has played such an extraordinarily large role in markets since the 2008 crisis that professional traders have a lot of short-term money riding on Bernanke's next move.

Behind all that, though, there's a big issue for long-term investors too. The Fed is suggesting that the economy is finally headed to a healthy new phase, one that doesn't need an extra push from central bankers. The portfolio that worked in the post-2008 emergency years is likely to be a poor fit for what comes next.

Below are answers to the three biggest questions raised by the market's latest Fed frenzy.

What exactly is the Fed doing?

Ordinarily the Fed tries to influence the economy by setting short-term interest rates, cutting them to stoke growth or raising them when inflation looms.

But after the financial crisis, even driving short-term rates essentially to zero didn't do enough to invigorate growth. So the Fed stepped into markets in a bigger way. It bought up trillions of dollars of fixed-income investments, including long-term Treasury bonds and mortgage-backed securities.

Economists have endless debates about how (not to mention how much) this "quantitative easing," or QE, helps the economy. One idea is that it pushes yields on safe-haven assets so low that would-be buyers look instead to riskier investments like junk bonds and stocks, making individual investors feel richer and, it is hoped, more willing to spend and invest.

At least as important, though, is the message such unprecedented intervention sends. "The Fed signaled it was committed to supporting the economy," says Moody's Analytics economist Nate Kelley. "It reassured the markets."

Given both the Fed's big position in bond markets and the complex mental chess games it plays with investors, it's not hard to see why Wall Street has been so skittish lately.

The Fed's intervention can't go on forever. Bernanke's reminders of this have been mild: He hasn't said he'd reverse QE, just slow it.

Still, that's enough to get traders pondering whether other investors want to own risky assets without the Fed's implicit encouragement. "Everybody is worried about what everybody else is doing," says BlackRock chief investment strategist Russ Koesterich. "Volatility is going to be hard to avoid."

Will a Fed shift crush stock market gains?

No one likes to sit through wild up-and-down markets. The important thing for long-term investors to remember, however, is the reason the Fed's talking about slowing QE at all: The economy is gradually looking better.

Unemployment, although still high, has fallen to below 8%, while other measures, such as household spending and the rate of home construction, have ticked up. And all this has happened without stoking inflation, which has hovered below 2%.

That means there's relatively little pressure for the Fed to aggressively choke off growth to keep prices under control.

Related: Stocks that can rise with rates

All that sounds like good news to some Wall Street bulls. They've been arguing that once lingering financial-crisis angst fades, stocks are poised to take off much the way they did in the early 1980s when investors finally overcame the trauma of the Carter-era inflation and oil shocks.

"It's almost a mirror image" of that time, says Oppenheimer chief market strategist John Stoltzfus. He predicts that the Standard & Poor's 500 could climb another 9% by year-end.

That's the bull case. Now for the caveats: First, Bernanke and the Fed could be wrong about the outlook for growth -- they have been before -- and as a result tighten much too early. Second, even if the economic situation bodes well, much of the good news may already be factored into today's prices, thanks to the Fed's prodding.

With the market up about 20% in the past year, stocks have been trading at about 14 times their expected profits over the next year. That's more or less in line with the historical average. This doesn't augur a terrible bear market, but it does suggest more modest long-term gains ahead.

Compared with what appears to be ahead for bonds, however, modest stock gains would count as banner news.

How risky are bonds now?

As the economy gets better, the Fed should allow longer-term interest rates to rise above their historically low levels. Those rates aren't set directly by the Fed, but by the bond market, so things could happen quickly once traders are convinced that the Fed's outlook has shifted and demand higher yields. Since rising yields mean falling prices, investors in bond mutual funds and ETFs could face sharp losses.

Related: Higher mortgage rates won't hurt recovery, Fannie finds

Some have already had a taste of this: When the yield on the 10-year Treasury jumped from 1.66% in early May to 2.41% in mid-June, long-term bond funds lost about 6% of their value.

Janney Montgomery Scott chief fixed-income strategist Guy LeBas expects rates to continue rising; even assuming sluggish economic growth, his firm forecasts rates at 2.7% next year. With yields so low, "it's a lot easier to go up than down," he says.

You can estimate how sharp your losses would be on your bond funds by looking at a statistic called duration. (Find it on the fund quote page at Morningstar.com.) A portfolio with a duration of six years -- about middle of the road for bond funds -- would see a drop of 6% if interest rates rise one percentage point.

This doesn't mean you should forgo fixed income in favor of stocks -- although bonds look risky now, that doesn't make stocks safe. The wiser move is to shift to shorter-duration funds, and even cash or money-market accounts for money you can't afford to lose.

By staying short, you have to miss out on some yield now, at a time when income is painfully hard to get. But when the Fed's training wheels come off and yields turn around, you'll be well positioned to take advantage of higher rates.

First Published: July 19, 2013: 6:24 PM ET

12.08 | 0 komentar | Read More

Judge orders Detroit to withdraw bankruptcy filing

Detroit might have to drop its bankruptcy case if a state court judge's order Friday afternoon is upheld on appeal.

NEW YORK (CNNMoney)

But Michigan Attorney General Bill Schuette said in a statement soon after the decision that he intended an immediate appeal to the Michigan Court of Appeals and would seek to block this latest order from taking effect while the appeal is heard.

The order came in response to motions by lawyers for retirees and pension funds for city workers, who argue the state constitution prohibits cutting pension and retirement benefits, as has been proposed in the bankruptcy case.

Related: Detroit files bankruptcy

The order was from Ingham County Circuit Judge Rosemarie Aquilina, the county that includes the state capital of Lansing. Aquilina had been ready to issue an order Thursday that would have blocked the filing in federal bankruptcy court, but the hearing on the motion to do so started five minutes after the bankruptcy case was filed.

Related: Detroit bankruptcy filing came with only 5 minutes to spare

It's not clear if a state court judge legally can order a party in a federal case to drop that action.

"Obviously there are constitutional issues," said Michael Sweet, a bankruptcy attorney with the California law firm of Fox Rothschild and an expert in municipal bankruptcy cases. "Anyone who thought this case would be resolved quickly was sorely mistaken. There is too much at stake for too many people. Clearly the gloves are coming off."

Detroit became the largest municipal bankruptcy in U.S. history Thursday evening when emergency manager Kevyn Orr filed the case in federal bankruptcy court in Detroit. Orr had been appointed to oversee Detroit's finances by Gov. Rick Snyder. Snyder authorized the bankruptcy filing. Aquilina's order says that Snyder must now order Orr to withdrawal the case.

The American Federation of State, County and Municipal Employees, a union opposed to the bankruptcy filing, praised the judge's ruling.

"There is too much at stake to play political games with the hard-earned retirement security of Detroit's public workers," union president Lee Saunders said in a statement.

CNNMoney's James O'Toole contributed reporting.

First Published: July 19, 2013: 4:23 PM ET

12.08 | 0 komentar | Read More

SEC charges Miami with fraud, accuses city of lying about finances

The SEC sanctioned Miami for similar conduct in 2003.

NEW YORK (CNNMoney)

The SEC said Michael Boudreaux helped falsify Miami's financial reports for the 2007 and 2008 fiscal years and lied about the city's finances in a series of 2009 bond offerings worth $153.5 million. Boudreaux allegedly orchestrated the unlawful transfer of nearly $38 million out of Miami's capital improvement fund in order to mask deficits in the city's general fund.

The SEC sanctioned Miami for similar conduct in 2003. The case marks the first time the agency has alleged repeated wrongdoing by a city subject to a previous cease-and-desist order.

Related: SEC charges hedge-fund mogul Steve Cohen

"The fact that a city official would enable these false and misleading disclosures to investors merely a few years after Miami had been reprimanded by the SEC for similar misconduct makes this repeat behavior all the more appalling and unacceptable," George Canellos, the SEC's co-director of enforcement, said in a statement.

Lawyers for Miami and Boudreaux did not immediately respond to requests for comment, nor did spokespeople for the city.

Miami was forced to reverse most of the transfers from the capital improvement fund following a report issued by a city watchdog in November 2009, the SEC said. The city subsequently declared a "state of fiscal urgency" and had its debt downgraded by ratings agencies.

The SEC also charged the state of Illinois and the city of Harrisburg, Pa. earlier this year with misrepresenting their finances to investors.

First Published: July 19, 2013: 6:21 PM ET

12.08 | 0 komentar | Read More

Be set when the Fed's help ends

When the Fed's training wheels come off and yields turn around, position yourself to take advantage of higher rates.

(Money Magazine)

Look at what happened in late May and June after chairman Ben Bernanke said the Fed would, eventually, assuming things get better, start to pare back its aggressive efforts to keep credit flowing. The rally on the Dow, which not long ago had crossed 15,000, pulled back sharply. Treasury rates jumped to a 20-month high by late June. (When yields go up, bond prices go down.)

For bond fund investors, the sell-off meant "their worst month since the Greek financial crisis," according to Lipper analyst Jeff Tjornehoj.

How can so much hang on the ambiguous words of one economist? As you'll see, the Fed has played such an extraordinarily large role in markets since the 2008 crisis that professional traders have a lot of short-term money riding on Bernanke's next move.

Behind all that, though, there's a big issue for long-term investors too. The Fed is suggesting that the economy is finally headed to a healthy new phase, one that doesn't need an extra push from central bankers. The portfolio that worked in the post-2008 emergency years is likely to be a poor fit for what comes next.

Below are answers to the three biggest questions raised by the market's latest Fed frenzy.

What exactly is the Fed doing?

Ordinarily the Fed tries to influence the economy by setting short-term interest rates, cutting them to stoke growth or raising them when inflation looms.

But after the financial crisis, even driving short-term rates essentially to zero didn't do enough to invigorate growth. So the Fed stepped into markets in a bigger way. It bought up trillions of dollars of fixed-income investments, including long-term Treasury bonds and mortgage-backed securities.

Economists have endless debates about how (not to mention how much) this "quantitative easing," or QE, helps the economy. One idea is that it pushes yields on safe-haven assets so low that would-be buyers look instead to riskier investments like junk bonds and stocks, making individual investors feel richer and, it is hoped, more willing to spend and invest.

At least as important, though, is the message such unprecedented intervention sends. "The Fed signaled it was committed to supporting the economy," says Moody's Analytics economist Nate Kelley. "It reassured the markets."

Given both the Fed's big position in bond markets and the complex mental chess games it plays with investors, it's not hard to see why Wall Street has been so skittish lately.

The Fed's intervention can't go on forever. Bernanke's reminders of this have been mild: He hasn't said he'd reverse QE, just slow it.

Still, that's enough to get traders pondering whether other investors want to own risky assets without the Fed's implicit encouragement. "Everybody is worried about what everybody else is doing," says BlackRock chief investment strategist Russ Koesterich. "Volatility is going to be hard to avoid."

Will a Fed shift crush stock market gains?

No one likes to sit through wild up-and-down markets. The important thing for long-term investors to remember, however, is the reason the Fed's talking about slowing QE at all: The economy is gradually looking better.

Unemployment, although still high, has fallen to below 8%, while other measures, such as household spending and the rate of home construction, have ticked up. And all this has happened without stoking inflation, which has hovered below 2%.

That means there's relatively little pressure for the Fed to aggressively choke off growth to keep prices under control.

Related: Stocks that can rise with rates

All that sounds like good news to some Wall Street bulls. They've been arguing that once lingering financial-crisis angst fades, stocks are poised to take off much the way they did in the early 1980s when investors finally overcame the trauma of the Carter-era inflation and oil shocks.

"It's almost a mirror image" of that time, says Oppenheimer chief market strategist John Stoltzfus. He predicts that the Standard & Poor's 500 could climb another 9% by year-end.

That's the bull case. Now for the caveats: First, Bernanke and the Fed could be wrong about the outlook for growth -- they have been before -- and as a result tighten much too early. Second, even if the economic situation bodes well, much of the good news may already be factored into today's prices, thanks to the Fed's prodding.

With the market up about 20% in the past year, stocks have been trading at about 14 times their expected profits over the next year. That's more or less in line with the historical average. This doesn't augur a terrible bear market, but it does suggest more modest long-term gains ahead.

Compared with what appears to be ahead for bonds, however, modest stock gains would count as banner news.

How risky are bonds now?

As the economy gets better, the Fed should allow longer-term interest rates to rise above their historically low levels. Those rates aren't set directly by the Fed, but by the bond market, so things could happen quickly once traders are convinced that the Fed's outlook has shifted and demand higher yields. Since rising yields mean falling prices, investors in bond mutual funds and ETFs could face sharp losses.

Related: Higher mortgage rates won't hurt recovery, Fannie finds

Some have already had a taste of this: When the yield on the 10-year Treasury jumped from 1.66% in early May to 2.41% in mid-June, long-term bond funds lost about 6% of their value.

Janney Montgomery Scott chief fixed-income strategist Guy LeBas expects rates to continue rising; even assuming sluggish economic growth, his firm forecasts rates at 2.7% next year. With yields so low, "it's a lot easier to go up than down," he says.

You can estimate how sharp your losses would be on your bond funds by looking at a statistic called duration. (Find it on the fund quote page at Morningstar.com.) A portfolio with a duration of six years -- about middle of the road for bond funds -- would see a drop of 6% if interest rates rise one percentage point.

This doesn't mean you should forgo fixed income in favor of stocks -- although bonds look risky now, that doesn't make stocks safe. The wiser move is to shift to shorter-duration funds, and even cash or money-market accounts for money you can't afford to lose.

By staying short, you have to miss out on some yield now, at a time when income is painfully hard to get. But when the Fed's training wheels come off and yields turn around, you'll be well positioned to take advantage of higher rates.

First Published: July 19, 2013: 6:24 PM ET

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Judge orders Detroit to withdraw bankruptcy filing

Detroit might have to drop its bankruptcy case if a state court judge's order Friday afternoon is upheld on appeal.

NEW YORK (CNNMoney)

But Michigan Attorney General Bill Schuette said in a statement soon after the decision that he intended an immediate appeal to the Michigan Court of Appeals and would seek to block this latest order from taking effect while the appeal is heard.

The order came in response to motions by lawyers for retirees and pension funds for city workers, who argue the state constitution prohibits cutting pension and retirement benefits, as has been proposed in the bankruptcy case.

Related: Detroit files bankruptcy

The order was from Ingham County Circuit Judge Rosemarie Aquilina, the county that includes the state capital of Lansing. Aquilina had been ready to issue an order Thursday that would have blocked the filing in federal bankruptcy court, but the hearing on the motion to do so started five minutes after the bankruptcy case was filed.

Related: Detroit bankruptcy filing came with only 5 minutes to spare

It's not clear if a state court judge legally can order a party in a federal case to drop that action.

"Obviously there are constitutional issues," said Michael Sweet, a bankruptcy attorney with the California law firm of Fox Rothschild and an expert in municipal bankruptcy cases. "Anyone who thought this case would be resolved quickly was sorely mistaken. There is too much at stake for too many people. Clearly the gloves are coming off."

Detroit became the largest municipal bankruptcy in U.S. history Thursday evening when emergency manager Kevyn Orr filed the case in federal bankruptcy court in Detroit. Orr had been appointed to oversee Detroit's finances by Gov. Rick Snyder. Snyder authorized the bankruptcy filing. Aquilina's order says that Snyder must now order Orr to withdrawal the case.

The American Federation of State, County and Municipal Employees, a union opposed to the bankruptcy filing, praised the judge's ruling.

"There is too much at stake to play political games with the hard-earned retirement security of Detroit's public workers," union president Lee Saunders said in a statement.

CNNMoney's James O'Toole contributed reporting.

First Published: July 19, 2013: 4:23 PM ET

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What's next for Detroit

For citizens of Detroit there should not be much immediate impact from Thursday's bankruptcy announcement.

NEW YORK (CNNMoney)

Snyder, the man who authorized the filing, said city services should not immediately be affected.

In fact, he suggested that the bankruptcy could actually improve city services in the future, because less of the city's budget will have to be spent on "legacy costs" such as pensions, retiree health care and debt service.

"I know many will see this as a low point for in the city's history," he said. "If anything, this gets us on the path towards improved services."

Emergency Manager Kevyn Orr's reorganization plan says the city cannot afford the $11.5 billion of pension benefits, retiree healthcare coverage and unsecured debt promised to the city's unions and the investors holding its debt. It proposes cutting those liabilities by 83% as a way of investing in improved services.

The unions have vowed to fight the cuts in court and with protests. But so far they haven't threatened a strike or some other job action.

"Detroit's Fire Fighters will continue to protect and serve during this difficult time, regardless of the economic challenges. You can count on us," said the Detroit Fire Fighters Association Thursday evening.

Related: Detroit files for bankruptcy

Michael Sweet, a California bankruptcy attorney with expertise in municipal bankruptcies, said residents might not see immediate changes in city services.

"At worst it should be minimal interruptions," he said. "But if you need something at City Hall, a birth or a death certificate, a city license renewal, you may not get it."

Vendors who provided goods or services to the city may not get paid what they're owed unless the city can argue they're an essential provider, Sweet said.

"One would assume because they've been cutting back spending, that most of the people currently providing services would fall in the essential category," he said.

Orr has already ordered a moratorium on payments on $2 billion of the city's debt in an effort to conserve its dwindling supply of cash.

The bankruptcy court will now hear arguments from the unions and other creditors whether the city should be able to enjoy the protections of a bankruptcy reorganization process. That hearing may not take place for many months, according to Sweet.

City of Detroit employees, retirees, tell us how this affects you

"Everyone who wants to knock them out of bankruptcy court will get one shot on the question of whether they are eligible," Sweet said. "There are various legal requirements. The city must show it acted in good faith in negotiation with creditors. It isn't just whether or not you're broke."

Unions charged there were no negotiations of any kind with Orr.

"They unilaterally embarked on this treacherous path without meaningful input from those who would be most affected," said Lee Saunders, president of the American Federation of State, County and Municipal Employees.

Sweet said some of the legal questions about the actions the city wants to take, especially the cuts to pensions and who gets paid what, could ultimately be up to the U.S. Supreme Court to decide years from now.

-- CNNMoney's James O'Toole contributed to this report

First Published: July 18, 2013: 7:39 PM ET

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Detroit's workers and retirees face big cuts

Emergency Manager Kevyn Orr proposed major pension cuts for both current and former city workers.

NEW YORK (CNNMoney)

As part of a reorganization plan, Emergency Manager Kevyn Orr has proposed to cut the city's debt by nearly 83% from $11.5 billion to $2 billion. Among those reductions, Orr has proposed major pension cuts for both current and former city workers.

"There must be significant cuts in accrued, vested pension amounts for both active and currently retired persons," Orr wrote in the June proposal to creditors.

Detroit has long struggled to afford the retirement benefits it has promised to workers. And as of June 30, the pension funds currently had an estimated shortfall of about $3.5 billion, a number far larger than was previously estimated, according to the proposal.

If the cuts are approved, that would ultimately mean that retirees would see smaller checks than they're currently receiving and workers would retire with lower benefits than expected.

"This is money they've earned, they counted on," said Karen Ferguson, director of the Pension Rights Center, a nonprofit that advocates for retirees. "They need these checks to pay their bills."

Related: Detroit files for bankruptcy

When employees of a bankrupt business lose their promised pensions, a federal agency called the Pension Benefit Guaranty Corp., or PBGC, provides a minimal level of benefits to the retirees. But municipal workers, which include police officers, firemen and sanitation workers, do not have a similar pension safety net in case of bankruptcy.

Making matters worse, many retired police and firefighters rely exclusively on their pension checks since they did not pay into Social Security, said Don Taylor, president of the Retired Detroit Police and Firefighters Association.

Ahead of the city's bankruptcy filing, the city's two public pension funds and at least two retirees filed lawsuits alleging that cuts to promised pension benefits would violate the state's constitution. The American Federation of State, County and Municipal Employees, or AFSCME, also oppose the cuts.

"Clearly, the Governor and the financial manager are eager to sacrifice the well-being of tens of thousands of workers and retirees, in violation of Michigan's state constitution," AFSCME President Lee Saunders said.

David Arthur Skeel, a University of Pennsylvania law professor and expert in bankruptcy law, said the proposed cuts may stand up in bankruptcy court, however.

While pensions have long been considered untouchable, both legally and politically, things are changing, he said, and a small Rhode Island town successfully cut pension benefits during bankruptcy last year.

Many cities and states have enacted pension cuts outside of bankruptcy as well, said Jean-Pierre Aubry, at Boston College's Center for Retirement Research. While many of the cuts have been focused on new employees, cuts affecting cost of living increases for current retirees have also been upheld.

"Pensions are the lowest hanging fruit," he said. "It is one of the easiest areas to tackle."

Still that doesn't mean that Detroit's pensions are likely to be completely decimated.

"The people who are running the bankruptcy are going to be quite mindful that this has real effects on real people," Skeel said.

CNNMoney's Tami Luhby contributed to this report.

First Published: July 18, 2013: 8:34 PM ET

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