Short on Money, McCain Campaign Dismisses Dozens

Marc Santora and David D. Kirkpatrick contributed reporting.
July 3, 2007.

The presidential campaign of Senator John McCain, the Arizona Republican who once seemed poised to be his party’s nominee in 2008, acknowledged yesterday that it was in a political and financial crisis as a drop in fund-raising forced it to dismiss dozens of workers and aides and retool its strategy on where to compete.

The campaign said the decline in contributions had left it with $2 million. It said it had raised just $11.2 million over the last three months, despite Mr. McCain’s promise to do better than his anemic $13 million showing in the first three months of the year.

Mr. McCain’s advisers blamed his close association with the recently defeated immigration bill, which was strongly opposed by conservatives already skeptical of his ideological credentials. But he has also had to contend with a host of other issues, including his support of the Iraq war, opposition from evangelical voters, the prospect of former Senator Fred D. Thompson’s entry into the race, and the sense that his continuing struggles to raise money were consuming the campaign and making fund-raising even more difficult.
Mr. McCain was visiting Iraq as his aides moved to reshuffle his campaign organization a second time. They said they would focus his efforts now on three states with early contests: Iowa, New Hampshire and South Carolina.

The problems fueled speculation that Mr. McCain would pull out of the race, a notion that his aides were quick to reject.

They also sent a jolt of uncertainty through Republican circles when many in the party are uneasy with their current candidates and are worried about their prospects against a far more determined Democratic field.

The party has failed to coalesce around a favored candidate, with conservatives skeptical of Rudolph W. Giuliani’s support of abortion rights and Mitt Romney facing scrutiny for shifting his positions on key social issues.

Mr. McCain’s campaign was in flux particularly in Iowa, where half of his 16-member staff was let go yesterday, campaign officials said. His state director left, and Jon Seaton, his national field director, headed to Iowa to take over.

Department heads spent yesterday calling in lower-level staff members to inform them of their dismissals. Mr. McCain’s advisers said they were cutting back on consultants, with those in the fund-raising area losing their guaranteed monthly retainers. The moves amounted to a sharp scaling back of what had once been a gold-plated campaign.

Top advisers to Mr. McCain, a Vietnam veteran known for his maverick streak, said the problems might force him to accept federal matching money, which could pump $6 million into his primary campaign but force him to abide by strict spending limits.

Mr. McCain’s aides expressed hope that with the immigration battle over, the campaign could recover its momentum as the focus shifted to other issues, like federal spending. And the history of American primary campaigns is replete with examples of troubled candidates rising from major setbacks.

“The decisions we made today were not easy,” said Terry Nelson, the McCain campaign manager, who said he would no longer accept a salary.

While refusing to go into detail about the depth of the cuts or say exactly how many staff members had been fired, Mr. Nelson said “every department” had been affected. Republicans close to the campaign said that at least 50 and as many as 80 people were being let go, out of a staff of around 150 people.

Campaign strategists said Mr. McCain’s ability to raise money was severely limited in recent weeks by the reaction to his support of the immigration legislation, which collapsed last Thursday in the Senate. They said Mr. McCain was now looking to raise $50 million this year — half of what he once expected — and was retooling the campaign to save as much money as possible for television advertising and travel.

“Clearly, we didn’t meet our goals for the second quarter in fund-raising, which I largely attribute to the immigration legislation that has dominated the news for the past two months, and his position is not too popular with our small donors,” said Charlie Black, a senior Washington political strategist who is a volunteer adviser to Mr. McCain. “We have got to restructure the budget and the organization.”

Mr. Black and others dismissed any suggestion that the moves were a precursor to Mr. McCain’s dropping out, particularly with the race still in its early stages and with no other candidate breaking away. John Weaver, another senior adviser to Mr. McCain, said the senator would now focus almost exclusively on the three early primary and caucus states.

After the defeat of the immigration bill, Mr. McCain told reporters he had no intention of leaving the race despite the setback on what has become a driving issue for him.

“Why would I contemplate such a thing?” he said. “I don’t know why I would even remotely consider such a thing in the month of June and July. It’s always been hard for me to raise money. None of the special interests are contributing because they don’t want me to be president.”

Mr. McCain’s allies in the Senate had hoped that approval of the immigration legislation would help him politically by showing that there was consensus on his position, tightening the borders while offering the prospect of legal residency to some illegal immigrants. But the widespread Republican abandonment of the bill only further undercut him and caused him particular trouble in Iowa, where aides said polls had found that his support had plummeted to single-digit numbers.

The scene yesterday at McCain headquarters in suburban Virginia was described as somber. People were called in and told they were being dismissed, effective immediately. They were given two weeks’ severance pay. A dozen senior campaign aides either agreed to work without salary or for less pay.

Senior McCain advisers say they realized over the past few months that they had to change the mindset that they were running what one called a “Bush-Cheney campaign,” with the plush offices, army of consultants and extended staff befitting a front-runner. Mr. McCain himself had raised questions about the size of the operation and also bristled at making fund-raising calls.

Rival campaigns said they still considered Mr. McCain a threat, but added that the decision to reduce his staff in the primary states of Iowa, New Hampshire and South Carolina could be disastrous because a strong organization was crucial.

Mr. Black, the McCain adviser, was adamant that the senator was competitive in those states and said the end of the immigration fight could ultimately help Mr. McCain by shifting attention from the issue.

“This will fade over time,” he said. “He has got as good a chance as anyone else.”

The immigration battle resonated particularly in South Carolina, where the state’s two Republican senators split on the measure. Senator Lindsey Graham, a top McCain ally, supported the bill, and Senator Jim DeMint was a leading opponent.

Katon Dawson, the chairman of the South Carolina Republican Party, said that Mr. McCain had been hurt but that the race there would be decided on more than one issue.

“I do think it has wounded him, but I don’t think it has taken him out of the game,” Mr. Dawson said. “There is time to recover from this.”

Americans on economy: This hurts

Nationwide poll locates sore spots as consumers are knocked around by inflation and gas prices. Consumers hunker down but feel optimistic about future.

NEW YORK (CNNMoney.com) -- Some economists say the United States is not in a recession, but don't tell that to the majority of American consumers.

A national CNN/Opinion Research Corp. poll released this week found that the recent economic downturn has taken its toll.

Americans are driving less and even cutting back on necessities such as food and medicine. The financial strains have led a vast majority of people to believe that the U.S. economy has entered a recession.

"This economic downturn will be relatively mild according to the numbers," said Wachovia economist Mark Vitner. "But the pain and discomfort for the consumer will be the most severe since 1991, and possibly since 1981 to 1982."

But there is some hope for the future, as a majority of those surveyed feel that the economy will rebound in 2009.

Majority think U.S. economy is in a recession. Americans think the economy is now in a recession and the number who feel that way continues to grow.

Of the more than 1,000 adult Americans conducted March 14-16 , 74% said they believe the nation is now in a recession. That figure rose from 66% in February and 61% in January.

Economists' definition of a recession is two consecutive quarters of negative GDP growth, and though growth was sluggish in the last quarter - 0.6% - the U.S. economy has not yet shown one quarter of retraction. But to the average American, times are still tough.

"What they're describing is different from a recession - they're giving a common sense definition of a recession," said Wachovia economist Mark Vitner. "They're saying that these are tough economic times, and from that perspective they're absolutely right."

Inflation is top concern. Most Americans think times are tough because they are feeling the pinch from rising prices.

The survey showed that 65% said they are "very concerned" about inflation, and 26% said they are "somewhat concerned."

Unemployment concerns also loom large, with 59% saying they are "very concerned" and 27% saying they are "somewhat concerned" about job losses.

According to the Department of Labor, the United States has already lost 85,000 jobs so far in 2008, with February's net job report showing the worst loss in nearly five years.

American's concerns framed the issue that faced the Federal Reserve, which attempted to balance the threat of recession against rising inflation in its 3/4 percentage point cut of its key interest rate Tuesday.

The central bank cuts rates in order to boost the economy and, in this round, to stave off a recession. But lower interest rates can also weaken the dollar, sending inflation higher.

Though the Fed decided to cut rates further, it noted that "uncertainty about the inflation outlook has increased," in a statement following the rate cuts Tuesday. But the central bank said it will closely monitor inflation in the future.

"The Fed is definitely concerned, because [inflation] issues impact consumers," said Wachovia economist Sam Bullard.

Cash strapped, and driving less. Escalating prices - specifically rising gas prices - have taken their toll on Americans, causing them to drive less.

Seventy-two percent of respondents said recent price increases in gasoline have caused financial hardship for them or their households.

"For some time we've been trying to determine the breaking point for when gas prices take their toll on the consumer," said John Kilduff, an energy analyst at the trading firm MF Global. "It appears we've found that point."

Rising fuel prices have caused most Americans to cut back on their driving. Of the over 1,000 American adults surveyed in the poll conducted March 14-16, 64% said they have made some changes to their driving behavior as a result of higher gas prices, with 19% saying they have cut back on driving enough to have a major effect on their daily lives. And 5% say they have stopped driving altogether.

Financial pain hits close to home. The slumping economy is not only hurting Americans at the pump, but it's causing pain where it hurts the most: daily necessities like food and drugs.

Thirty percent of respondents are trimming their spending on food and medicine and that 57% are worried they will have to cut back soon. Nearly half said they have cut back on how much heating or electricity they use in their homes, and 53% are concerned that they will have to trim spending on heating in the future.

"Consumers are definitely feeling a pinch on rising prices of staple products like food," said Wachovia economist Adam York. "There are some consumers that are having some real trouble in this environment."

Typically in an economic downturn, consumers have shifted their spending from discretionary items like electronics and leisure activities in order to continue paying for food and drugs. But continually escalating prices may have left consumers with little left to cut.

A recent Commerce Department report shows that consumers' food and beverage spending dropped 0.2% in February from the previous month and grocery store sales fell 0.3%.

"Instead of buying steak, they're buying chicken," said York. "People are buying generics and reducing spending by shifting to cheaper alternatives."

Confident in 2009 turnaround. Though times are tough now, Americans believe the economy will bounce back by next year.

The poll showed 60% of respondents think economic conditions in the United States will be "good" next year, as opposed to the 75% who think the economic situation is "poor" now.

"Most people realize that the economy has cycles of ups and downs," said Bullard. "Fortunately, the last two recessions were some of the shortest on record, so in 2009 we should be pulling up out of this."

Americans agree with the economists. Eighty-three percent said they are "confident" that they will be able to maintain their standards of living next year, and 85% are "confident" they will keep their jobs over the next six months.

Consumers also showed faith that they would be able to pay off their future debts, with 90% of respondents demonstrating confidence they would be able to meet their monthly mortgage payments for the duration of the mortgage. Nearly as many Americans - 83% - said they could pay off college loans, car payments, and credit cards in the future. The average amount of credit card debt of those polled was $4,000.

"The Fed's rate cuts will start to take their toll later this year, and the economy should bounce back by the end of 2008," Bullard said.

College saving: Do it now

Whether the stock market is up or down, start saving for your children's education before it's too late.

NEW YORK (CNN) -- As the stock market was tumbling early this year, 40-year-old Eric Horowitz decided he could handle only so much pain. His daughter Elizabeth attends private high school, and a year from September she'll be a freshman in college. So Horowitz chopped his exposure to stocks to about 60% of his portfolio down from 85%.

"I think the stock market is always risky," says Horowitz, a single, divorced father in Manhattan, and a self-employed "executive coach." "You always bet on yourself first. First put your money into yourself, into your children."

Parents are spending record amounts for their children's education. The average cost for tuition, fees, room and board at a four-year private college is $32,307 this year, as calculated by the College Board. That's up 6% from the prior academic year.

"How am I going to make it?" asks Horowitz, who says he is already paying $30,000-a-year for Elizabeth's private school education. "How am I going to get all four years through - and hopefully she won't go to graduate school."

A common dilemma
Horowitz is not alone in fearing that the stock market could be too volatile to provide the income he needs to pay for Elizabeth's education.

Mutual fund giant T. Rowe Price says parents have been pulling back on investing in 529 college savings plans, which accumulate tax-free as long as the account is spent on a child's college education. New accounts this year are down about 20%, according to T. Rowe Price, while existing customers are contributing 10% less to 529s.

"It certainly appears as though it is the economy that's impacting consumers," says T. Rowe Price's Tom Kazmierczak. "It's very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage," he says. "It really can be the wrong thing to do particularly if you've got younger children at home."

Financial advisor Thomas Henske of Lenox Advisors recommends that clients who can afford it tuck away $10,000-$12,000 annually in an investment account for each child beginning at birth. If the investments can achieve an 8% return, the child's college expenses should be fully funded at about $90,000 a year, he estimates.

"What's going to make the difference is putting that money away on a regular basis, investing it the right way with a long term approach," says Henske.

It's never too early
Robin Kahn, an attorney who is mother of two students at Millburn High School in New Jersey, says she and her husband Scott ignored a close friend who had advised them to begin saving for college when their children were born.

"It wasn't until the mid-90's when we started," says Kahn. "That was definitely a mistake. We should have listened."

Both children, Max, a senior, and Gabrielle, a freshman, now have investment accounts for college. But their parents expect to dip into their own savings for college.

"It's definitely not enough. We don't have enough for four-years for each of them," Kahn says. "We'll have to see what scholarships or grants or loans are available to us."

Horowitz also says he hasn't saved nearly enough to pay for Elizabeth's college. His plan is to set aside as much of his annual earnings as possible to pay for tuition, and take out loans for the remainder.

How Sulzberger beat the hedge funds at their own game

The New York Times chairman may have neutralized his hedge fund critics by giving them board seats.
NEW YORK (Fortune) -- It seemed too easy. Two months ago, a pair of little-known hedge funds informed the New York Times that they were mounting a campaign to elect four directors to the company's board. Monday, the nation's most powerful newspaper publisher capitulated and agreed to support two of the insurgent nominees at its annual meeting next month.

How could the Times be so easily bought to its knees? The dissidents - Harbinger Capital Partners and Firebrand Partners - amassed a nearly 20% stake in the Times (NYT). The company's controlling shareholders, the Sulzberger/Ochs clan, couldn't brush off them off as they did a Morgan Stanley (MS, Fortune 500) fund manager who tried to shake things up at the company last year.

The hedge funds have declared victory. But perhaps they are being a little hasty. The truth is, Arthur Sulzberger Jr., the company's chairman, may have been the true winner for avoiding a bitter proxy war that might have raised questions about his leadership and damaged the Times.

The New York Times, after all, is no ordinary public company. Presidents quake before Times' op-ed columnists like Maureen Dowd. Wall Street isn't as easily cowed - not when the company's stock has fallen nearly 60% in the last five years. But even deep-pocketed hedge fund managers can't play too roughly with the Paper of Record.

Harbinger and Firebrand grasped this far better than Morgan Stanley. Hassan Elmasry, one of the investment bank's fund managers, tried to force the Sulzberger/Ochs family to do away with the company's sacrosanct two-tiered stock structure. It's easy to see why. The clan owns shares that have super-voting rights, making the Times impervious to hostile takeovers.

If the family lost that veto power, a Rupert Murdoch could swoop in and add the Times to his empire. That would have been great for Elmasry's fund. But it would have threatened the quality of the company's flagship paper.

Elmasry ended up looking like a stereotypical Wall Street barbarian interested in nothing but a quick buck. The Sulzbergers came across as principled guardians of journalistic independence by standing up to him.

The new dissidents didn't make the same mistake. They bought up shares like typical green-mailers. But publicly, Harbinger and Firebrand offered the Times nothing but olive branches. "I want to assure you that we are not pursing a change in the dual class shareholder structure," Firebrand Partners founder Scott Galloway wrote Times chairman Arthur Sulzberger Jr., on Jan. 27.

Sulzberger, however, demonstrated that he had also learned something from his tussle with Morgan Stanley. He beat back Elmasry, but looked as if he was turning a deaf ear to the fund manager's legitimate complaints about the company's poor financial performance. That didn't sit well with the investors. At last year's annual meeting, half of the non-family shareholders withheld their votes in protest.

Now Sulzberger is wisely casting himself as a conciliator. Instead of ignoring the hedge funds, he agreed to enlarge the company's 13-member board to make room for two of the candidates proposed by the hedge funds: Scott Galloway and James Kohlberg, co-founder of private equity firm Kohlberg & Company.

In doing so, the Times chairman may have may have effectively neutralized the dissidents - at least, for a while. The hedge funds can't complain that he is ignoring them, but they don't have enough votes to sway the board either.

Perhaps Harbinger and Firebrand might have done better if they had a chance to fight it out with the Times over board seats. That way, they might have rattled the company's controlling shareholders and forced them to sell some non-core assets like the company's stake in the Boston Red Sox to boost shareholder value. Now the hedge funds have to play nice - even with nearly 20% of the company's shares.

Oh, and about those shares. In the end, Harbinger and Firebrand want a sizable return on their investment. They are likely to discover there are no miracle cures for newspaper publishers. Isn't that what Times CEO Janet Robinson has been saying for a while? Well, nobody can say that Harbinger and Firebrand haven't been warned.

Stocks surge in early going

Wall Street aims higher as investors welcome Lehman and Goldman earnings, and gear up for the Fed.

NEW YORK (CNNMoney.com) -- Stocks rose at the open Tuesday as investors welcomed better-than-expected earnings from Goldman Sachs and Lehman Brothers and geared up for an expected interest rate cut from the Federal Reserve later in the day.

The Dow Jones industrial average added over 200 points or 1.7% at the open. The Nasdaq composite index gained 1.9%. The Standard & Poor's 500 index rose 2.2%.

Stocks were mostly lower Monday after Bear Stearns (BSC, Fortune 500)' fire sale to JP Morgan chase (JPM, Fortune 500). However, falling commodity prices and anticipation about the Fed helped stocks close off the lows.

In the news Tuesday:

Lehman Brothers. Shares of the brokerage surged 20% after it reported weaker quarterly sales and earnings that beat estimates, despite taking $1.8 billion in writedowns for bad mortgage bets. Lehman also sought to reassure investors that it was not in danger of seeing a fate similar to that of Bear Stearns, saying that it has maintained a strong liquidity position. Stock (LEH, Fortune 500)

Goldman Sachs. The Wall Street firm managed to report another quarter of better-than-expected sales and earnings, despite the ongoing market turmoil, although results were sharply lower versus a year ago. Shares gained 9% at the open. Stock (GS, Fortune 500)

Federal Reserve. Central bankers meeting Tuesday are expected to cut the fed funds rate, a key overnight bank lending rate, by as much as a full percentage point, with an announcement expected at 2:15 p.m. ET. The Fed has already cut the fed funds rate by 225 basis points since September as a means of shoring up the struggling economy and unfreezing the blocked up credit markets. There are 100 basis points in one percentage point.

Housing. New home construction fell in February to just over a million properties, beating forecasts for a bigger drop. Building permits, a measure of builder confidence, tumbled more than expected.

Inflation. The Producer Price Index (PPI), which measures inflation at the wholesale level, rose as expected in February. But core PPI, which excludes volatile food and energy prices, rose more than expected.

Gold glitters again - sets new record

Investors flock to the commodity amid sinking dollar and worries about rising inflation.

NEW YORK (CNNMoney.com) -- Gold futures soared to a fresh all-time trading high above $1,000 an ounce Friday as the dollar sunk to new lows.

COMEX gold for April delivery touched $1,007.30 an ounce in morning trading before slipping back a bit.

After weeks spent hovering below the key psychological mark, gold finally hit $1,000 an ounce for the first time Thursday.

Behind gold's surge has been a drop in the dollar, which dropped below 100 yen for the first time since 1995 Thursday. It also has hit a string of record lows against the euro.

The greenback has fallen to record lows amid fears of a protracted slowdown in the U.S. and concerns about rising inflation.

A key inflation reading released by the Labor Department Friday showed consumer prices were flat last month, but there are signs that price pressures are building.

Commodity prices have soared recently. Oil prices have set 12 record highs in the past 13 trading sessions. The front-month crude contract is now trading just below $111 a barrel. Gasoline has set record highs for four straight days, as U.S. drivers now need to shell out an average of $3.28 a gallon.

Targeting the right fund mix

It’s easy to select a good asset allocation for your nest egg on your own, but if you don’t have the discipline to stay balanced, a target-date retirement fund could be your best option, says Money Magazine’s Walter Updegrave.

Question: I’ve got my 401(k) invested in a target-date retirement fund. I’m wondering, though, whether I would be better off investing it in large-cap, mid-cap, small-cap and blended funds, putting 25% into each option. What do you think? –J. Duffaut

Answer: You’ve no doubt heard the expression, “First, do no harm.” (You scholarly types may be more familiar with the Latin version, “Primum non nocere.”)

It’s a bedrock principle that all good physicians adhere to. The idea is that a doctor shouldn’t dole out medicine or prescribe a treatment that has an uncertain benefit for the patient but may have a good chance of causing harm.

In other words, a doctor must consider the downside before intervening.

Well, I think that individual investors - and particularly people who are building a nest egg for retirement in a 401(k) or similar account - ought to take this principle to heart as well.

Take the case of 401(k)s and target-date retirement funds. The number of 401(k) plans offering target funds has mushroomed over the past few years and more and more participants are plowing their contributions into this option. I think the growing popularity of target funds is good for two reasons:

1. They make retirement investing easy. Just choose a target fund with a date that roughly matches the year you plan to retire, and you get a ready-made diversified portfolio of stocks and bonds that’s appropriate for someone your age. What’s more, the fund automatically shifts its mix more toward bonds as you age, so that you take less investing risk as you grow older.

2. They can save us from our own worst impulses. Here I’m talking about our tendency to chase hot funds and sectors, buy into inflated asset classes and pour too much money into company stock and other investments that may be risky but we don’t necessarily see as risky. In short, target funds make it harder for us to sabotage our own retirement planning efforts.

Are target funds perfect? Of course not. But if your 401(k) offers this option, then it seems to me that before you reject it in favor of other funds, you ought to ask yourself: Can I do better on my own?

The answer may very well be yes. You don’t have to be an investing savant to put together a decent portfolio of stock and bond funds. But you do have to take responsibility for creating and maintaining a workable investment strategy - that is, deciding on a reasonable mix of stocks and bonds, choosing appropriate funds, monitoring their performance and then rebalancing your portfolio once a year.

If you don’t know enough about investing to do this or you’re not willing to put in the fairly minimal time and effort needed to do it (or you know deep inside that you’ll probably give in to the urge to tinker often enough that you may undermine your efforts), then it seems to me that taking an active approach has the potential to do more harm than good. In which case, I’d say you’re better off with a target fund.

Now, I don’t know you well enough to judge how capable or responsible an investor you are. But based on your question, my guess is that you’re probably a good candidate for a target fund.

Why? Well, you talk about putting equal amounts of money in large-, mid- and small-cap funds. That means you’ve got twice as much money in mid-size and small stocks combined as you do in the big boys. (Let’s leave the “blended” funds aside since I’m not sure what kind of funds you mean.)

But if you take a look at the percentage of total market value that large-, mid- and small-cap stocks actually account for in the stock market, you find that large stocks represent almost 75% of market value and mid- and small-caps combine for the other 25%. (You can see this for yourself by plugging the stock market ticker for Vanguard’s Total Stock Market Index fund—VTSMX—into the Instant X-Ray tool.)

This means that investors as a whole have allocated about three times as much of their capital to large stocks than medium and small ones. You, on the other hand, are proposing to do pretty much the opposite by putting twice as much in the mid-size and small stocks.

If you’re doing this because you believe you have insights that investors overall lack - in effect, you think they’ve made the wrong decision - then fine, maybe it makes sense to go so far against the grain. But if you don’t have insights or information the rest of the investing world doesn’t have, then I don’t see how you can justify divvying up your money as you’ve suggested.

Either way, I can tell you that by piling so much into mid- and small-size stocks (and putting nothing in bonds, unless they’re in your “blended” category), you are creating a very volatile portfolio that, if nothing else, is virtually guaranteed to give you a white-knuckle ride.

So I guess I would answer your question with one of my own - namely, how did you come up with that 25%-in-each-group strategy? And unless you have a very cogent reason for it, I’d say you’re better off sticking with your target-date fund.

That’s not to say, however, that at some point in the future you can’t switch out of your target-date fund and into a portfolio of individual funds you’ve created. But for that to make sense, I think at the very least you would want to have read a few of our Money 101 lessons, starting with the basics of investing, then moving on to stocks, bonds, mutual funds, asset allocation and, of course, retirement planning.

Until you do that, however, I say your first obligation is to do no harm, which means staying put in that target-date fund.

Lawmakers take aim at CEO compensation

High-profile former Wall Street CEOs and the head of the nation's largest home lender will testify before a Congressional committee examining the link between executive pay and the mortgage crisis.

Rep. Henry Waxman, D-Calif.
Why were executives at the helm of some of the world's largest banks compensated so richly even as their industry was being pummeled by the mortgage meltdown?
Lawmakers will pursue this question Friday when the House Committee on Oversight and Government Reform hears testimony from two former Wall Street CEOs, Charles Prince and Stanley O'Neal, and the chief of the nation's largest mortgage lender, Angelo Mozilo.

At issue are the salaries, bonuses, perks and stock awards that the executives received as the companies under their leadership took enormous losses on bad bets related to mortgage backed securities. Calls for accountability have become increasingly louder as the housing market continues to deteriorate and homeowners across the country face foreclosure.

Henry Waxman, the Democratic congressman who chairs the Committee, has developed a reputation as an aggressive reformer during his thirty years representing the Los Angeles area on Capitol Hill.

As a ranking member on the Committee, Waxman has tackled issues ranging from the high cost of prescription drugs to waste, fraud, and abuse in government contracting. Most recently, Waxman's committee made headlines when it held a series of high-profile hearings on the illegal use of steroids in major league baseball.


Stanley O'Neal, Merrill Lynch & Co.
2006: $46 million.
Stanley O'Neal relinquished his title as chairman and CEO of Merrill Lynch & Co. in October, after a 21-year career there, and less than a week after the company reported an $8 billion loss on subprime related investments.

According to a profile from Harvard Business School, where he earned his MBA in 1978, O'Neal was born into poverty in Alabama. As a young boy, he labored on his family's cotton farm while his mother worked as a cleaning lady.

He rose through the ranks at Merrill, becoming president and chief operating officer in July 2001. He was tapped as CEO in December 2002 and added the title of chairman in April 2003. The posts made him one of the most powerful African-American executives on Wall Street.

O'Neal was eventually replaced by John Thain, the former chief of NYSE Euronext. In 2006, O'Neal received $46 million in total compensation, including an $18.5 million bonus and $26.8 million in stock awards, according to SEC filings.


Charles O. Prince, Citigroup Inc.
2006: $24.8 million.
Charles Prince stepped down as CEO of Citigroup Inc. in November, not long after world's largest bank reported a 57% drop in quarterly earnings and lost nearly a quarter of its market value.

"It is my judgment that given the size of the recent losses in our mortgage- backed securities business, the only honorable course for me to take as chief executive officer is to step down," Prince said in a statement at the time.

Two months after Prince walked away, Citigroup suffered a $10 billion quarterly loss -- the largest ever in the company's history -- and announced an $18.1 billion writedown due to mortgage-backed investments.

In 2006, Prince's total compensation was $24.8 million, including a $13.2 million bonus and $10.4 million in stock awards. As part of his separation agreement with Citigroup, Prince is entitled to an office, executive assistant, and a car and driver for up to five years, according to a SEC filing.


Angelo Mozilo, Countrywide Financial
2006: $42.9 million.
Angelo Mozilo has already heard from lawmakers about the level of his compensation as the CEO of Countrywide Financial Corp.

Mozilo reportedly stood to collect a windfall of $115 million dollars after his firm agreed in January to a yet-to-be completed $4 billion sale to Bank of America. But after facing heavy criticism from lawmakers, including Sen. Hillary Clinton, Mozilo said he would forfeit $37.5 million in payments tied to the deal.

In January, Sen. Charles Schumer and Rep. Barney Frank, both openly criticized Mozilo's compensation as Countrywide became a symbol of the subprime mortgage crisis.

"Mr. Mozilo could display some goodwill by donating any severance pay he stands to receive to the nonprofit housing counselors trying to prevent foreclosures," Schumer said in a statement.

In 2006, Mozilo took home $42.9 million in compensation.

NEW YORK (CNNMoney.com) -- Despite all the pain the U.S. dollar has endured in recent days, the greenback may still have further to fall before seeing

Adviser-recommended annuities aren't always a red flag, but proceed with caution. Make sure you know what you're getting into before you buy in says Money Magazine's Walter Updegrave.

NEW YORK ( Money) -- Question: My 63-year-old mother earns about $1,200 a month, has $90,000 in savings and, as a result of a recent refinancing, has a $90,000 30-year mortgage. In three years she will begin collecting an estimated $1,300 a month from Social Security. A financial adviser suggests she put $60,000 into a variable annuity that is guaranteed to double in value in 10 years. Is this a good idea? --David, Denver, Colorado

Answer: Whenever someone tells me they're considering an investment that purports to deliver lofty guaranteed returns, my antennae automatically go up. Doubling your money in 10 years amounts to an annualized 7.2% gain, a guarantee that borders on too-good-to-be-true in almost any market, especially today's.

When this investment involves an annuity, I become even more suspicious because annuities are notorious for hitches and complications that can make them far less appealing than they seem.

And when I see that this annuity is being pitched to an older person, alarm bells really begin to go off for me because regulators have long warned about sales people earning big commissions by convincing seniors, often at "free lunch" seminars, to put their money into annuities and other investments that are often inappropriate.

I don't say all this because I am "anti-annuity." On the contrary, I think in many cases it can make sense for retirees to devote a portion of their savings to a certain type of annuity - an immediate annuity, a.k.a an income or payout annuity - while leaving the rest in conventional investments like stock and bond mutual funds. The idea is that the annuity can offer a guaranteed lifetime income, while the funds can provide liquidity as well as long-term growth.
Beware of hidden fees
But variable annuities are a different breed. They're often sold more as tax-advantaged investments than income vehicles. With a variable annuity you get to invest in "subaccounts," essentially mutual fund portfolios, whose gains are sheltered from taxes as long as your money remains in the annuity.

That sounds just peachy, but there are downsides too. When you pull those gains out of an annuity, they're taxed at ordinary income rates, even if they're long-term capital gains that are normally taxed at more attractive long-term capital gains rates. And most annuities also carry high fees that can dramatically reduce their returns and, in my opinion, undercut their effectiveness.

Over the past few years, many advisers have begun selling a type of variable annuity that's designed to provide retirement income. It's called a variable annuity with a guaranteed minimum withdrawal benefit. But as I've noted before, I believe the combination of this annuity's mind-boggling complexity and generally blimpish fees make it an inferior choice to a combination of a plain-old immediate annuity and mutual funds.

Get it straight
I don't know which type of variable annuity your mom is being pitched. But I do know that she needs to understand what it costs and how it actually works.

Just getting a handle on costs can be daunting because the disclosure of fees is, how should I put it, so non-consumer friendly that you can't help but wonder if annuity sellers are purposely making it difficult for people to understand what they're paying. I've proposed an E-Z Annuity Fee Disclosure form and, who knows, maybe one day annuity companies and regulators will come up with something similar (or better) on their own to help people like your mom.

As for understanding how the annuity works, that's an even bigger challenge. Let's start with that guarantee you mentioned. What exactly is guaranteed to double in 10 years? You might assume that it's the value of your account - that your mom invests $60,000 and in 10 years is guaranteed to have $120,000 no matter what happens in the financial markets.

But there may be any number of strings attached to that sum. For example, your mom might not actually be able to withdraw $120,000. To collect on the guarantee, she might have to take that amount in payments over the rest of her life. And the annuity company could pay a subpar return during that time, in effect taking away at the back end the alluring gain the annuity appeared to deliver the first 10 years.

Your mom also needs to know what happens if she has to get to her money for unexpected expenses or an emergency. Most variable annuities come with surrender charges that can start at 10% or more and take years to disappear. Many annuities allow you to withdraw up to 10% of your account value with no withdrawal charge, but withdrawals can also affect the guarantee. (Withdrawals from an annuity before age 59 1/2 can also trigger a separate 10% IRS penalty tax. That's not a concern for your 63-yer-old mom, but other readers should keep this tax in mind.)

Question an adviser's motives
My advice is that you and your mom sit down with an adviser and figure out how much income she'll need in retirement and how she should get it given her resources. She may not need an annuity. After all, Social Security provides lifetime income that's adjusted for inflation. If an annuity does make sense, the adviser can help her decide which type is right for her.

A fee-only planner willing to work on an hourly or flat-fee basis would be most likely to provide the most independent advice. You can find such planners in your area by clicking here.

One final note: I couldn't help but wonder whether your mom's $90,000 in savings came from the proceeds of her $90,000 refinancing. That led me to wonder whether the adviser recommending the annuity also recommended the refi.

If so, I'm not saying there's anything necessarily sinister going on. But it would raise additional suspicions in my mind about the adviser's motives, especially given all I hear about seniors being steered into reverse mortgages by people looking to sell them annuities or other products. If you come to the conclusion that the annuity salesman was behind the refi and that the goal was to sell your mom an annuity she didn't really need, I'd recommend reporting the incident to the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), your state securities regulator and your state insurance department.

I think it's worthwhile keeping regulators informed about what's going on given all the inappropriate investments, scams and other ploys being directed at seniors these days. Who knows? The information might prove helpful later on for someone else's mom.

Dollar: It will only get worse

Greenback likely to stay under pressure in near term but find relied by mid-year, currency experts argue.

NEW YORK (CNNMoney.com) -- Despite all the pain the U.S. dollar has endured in recent days, the greenback may still have further to fall before seeing any sort of relief, according to currency experts.

Driving much of the dollar's decline this week were tepid remarks about the U.S. economy by Federal Reserve Chairman Ben Bernanke, who hinted that the central bank would cut interest rates once again at the Fed's March meeting.

Those comments, combined with a number of troubling signs about the strength of the U.S. economy, helped send the dollar tumbling to multi-year lows against a host of currencies including the Swiss franc, the Malaysian ringgit and Japanese yen.

"It all points towards a weaker U.S. economy and currency traders don't want to be exposed to that kind of risk," said Gareth Sylvester, senior currency strategist and self-described "dollar bear" at HFIX Plc in San Francisco.

But perhaps the most notable move of the week was the dollar hitting successive all-time lows against the euro, breaking the key psychological barrier of $1.50 for the first time since the 15-nation currency was launched in 1999.

Currency experts, however, argue that the dollar will remain under pressure at least through the next month or longer.

If next Friday's February employment report is as bad as economists are anticipating, argues Joe Francomano, manager of foreign exchange with Erste Bank in New York, the greenback could possibly hit rock bottom at that point.

"You are going to see the momentum of this week carry over as far as dollar weakness goes and culminate next Friday," said Francomano.

How far could it fall?

The prevailing forecast lately is that the dollar will hit a ceiling of $1.55 against the euro in the near term and fall further against the yen, sinking as low as ¥101 or ¥102.

Even the most bearish currency experts agree that the pressure on the dollar should abate some time around the middle of 2008, after the Fed winds down its rate-cutting campaign and as the sluggish U.S. economy starts to perk up.

But where the dollar heads after that is anyone's guess.

Greg Anderson, executive director of forex strategy at ABN AMRO, expects the greenback to move towards $1.56 against the euro as 2008 comes to a close.

Ertse Bank's Francomano, however, argues that the dollar should wind up around $1.46 against the euro by year end as investors are lured back in by a discounted greenback.

"When the bad data has been processed and the Fed has cut rates to 2 percent or so, then expect the dollar to look cheap," said Francomano.

Saving the bond insurers: 5 fixes for the crisis

Just about everyone seems to have an idea on how to fix the troubled bond insurers and stave off a crisis that threatens to send the financial services sector into disarray.

Divide and survive
The plan: When testifying before Congress last week, New York Gov. Eliot Sptizer and State Insurance Superintendent Eric Dinallo told lawmakers that the best solution would be to recapitalize the bond insurers. If that failed, they would break up these firms into a "good bank" that would manage their healthy municipal bond insurance business, and a "bad bank" to oversee the smaller structured finance arm. Each division would remain part of a holding company.

The prospects: Likely. Of all the different solutions being floated, this proposal has garnered the most interest. After the bond insurer FGIC was downgraded last week by Moody's, the company asked Dinallo's office for permission to break itself up. Its larger rivals Ambac and MBIA are also reportedly considering similar moves.

A break-up would prevent cities and towns - which buy insurance on bonds they sell to raise money for projects like roads, schools and bridges - from getting saddled with higher borrowing costs. But it is widely believed that, after a split, the structured finance arm would wither and die, meaning downgrades on the asset-backed securities issued by Wall Street and more writedowns.

Uncle Warren to the rescue
The plan: A little over a week ago, Warren Buffett proposed a bold solution for the bond insurance crisis by offering to take over $800 billion of the industry's municipal bond obligations.

Under his plan, companies like Ambac and MBIA would focus on their troubled structured finance arm, which are the source of the industry's woes.

The prospects: Slim to none. Even though the announcement of the plan garnered significant attention, it appears unlikely that any of the companies approached will accept the deal; one firm has already rejected the offer, according to Buffett. More importantly, the plan would impose a pretty stiff premium on the bond insurers, while they would lose control of their low-risk and profitable municipal bond business.

Can you spare $15 billion?
The plan: When New York Insurance Superintendent Eric Dinallo implored some of Wall Street's top firms to kick in about $15 billion to help bail out the capital-squeezed bond insurers late last month, their responses were only moderately better than a cold-shoulder.

While major financial firms have a vested interest in keeping the insurers afloat, they have their own capital problems after losing billions as a result of the credit crisis.

The prospects: Possible. While a bank bailout plan seems unlikely, it is not off the table. A coalition of banks including Citigroup, BNP Paribas, Wachovia and UBS are reportedly working on a bailout plan of Ambac, the nation's second-largest bond insurer. One considerable risk, however, is that there is no indication that a one-time capital infusion would save these troubled firms' credit ratings. Sean Egan of independent ratings shop Egan-Jones has publicly stated that the bond insurers require somewhere closer to $200 billion in capital.

Short-seller solution
The plan: Pershing Capital Management's Bill Ackman has been one of the leading critics of the bond insurance industry, but offered up his own remedy for the crisis Wednesday. Under his proposal, the company's structured finance division would take control of its municipal business, with the two remaining under the umbrella of the holding company.

The prospects: Very doubtful. While the plan would insulate the municipal business and provide support to the structured finance division, it is unlikely that the industry would want Ackman to decide its fate, given his long-standing role as critic and industry short-seller. He stands to benefit if companies like MBIA continue to see their stock tumble even further. Just hours after Ackman pitched his idea, MBIA publicly rejected his proposal.

Buyer beware
The plan: Like the bank bailout program, the notion of a private equity, or distressed investor rescue doesn't remain out of the realm of possibilities. MBIA, for example, has raised about $2.6 billion in capital this year, part of which came from private equity firm Warburg Pincus. And famed distressed investor and billionaire Wilbur Ross has repeatedly said he is looking to invest in one of the bond insurers.

The prospects: Possible. While selling a stake to an outside investor would be a quick fix for the bond insurers, it remains to be seen if they could raise enough capital to satisfy Moody's and Standard & Poor's requirements to sustain their `AAA' rating. What's more, it would not necessarily cure the systemic problems that plague the industry, an area that some, including MBIA's newly appointed CEO Joseph "Jay" Brown, are hoping to fix.

Oil prices start to cool

Crude futures head downwards after heating up on weak heating oil inventory report.


NEW YORK (CNNMoney.com) -- Oil prices fell Thursday, despite a government report showing supplies of fuel used to make heating oil declined much more than expected.

Early Thursday afternoon, U.S. light crude for April delivery fell $2.39 cents to $97.31 a barrel. Oil traded up as much as 10 cents to $99.80 a barrel after the report's release at 10:30 a.m. ET, but have since retreated.

Traders initially thought the decline in distillates was demand-related, as colder temperatures in the Northeast have increased demand for heating oil, according to Phil Flynn, senior market analyst at Alaron Trading in Chicago.

But now Flynn believes that traders realize the weak supply is refinery-related, suggesting an overall decline in demand.

"The market's coming back down to earth," said Flynn. "$100 a barrel isn't a price anymore, it's a destination. It gets to the level, then it backs off."

In its weekly inventory report, the Energy Information Administration said crude stocks rose by 4.2 million barrels last week. Analysts were looking for a rise of 2.9 million barrels, according to a Dow Jones poll.

But distillates, used to make heating oil and diesel fuel, fell by 4.5 million barrels while analysts were looking for a 1.5 million barrel decline.

Refinery usage was lower than the previous week, operating at 83.5% capacity last week. And gasoline demand continued to fall, averaging just 9 million barrels per day over the past month.

These numbers are only a little higher than the same period last year.

Gasoline supplies rose by 1.1 million barrels, just above forecasts for a 1 million barrel rise.

Panning for black gold, a global challenge
Oil prices have soared recently as whispers of supply cuts and lower interest rates sent oil above $100 Tuesday and Wednesday.

Demand for gasoline has continued to weaken, leading some traders to believe that the Organization of Petroleum Exporting Countries will decide to cut its output at a March 5 meeting.

Also, in Federal Reserve meeting minutes released Wednesday, the U.S. central bank issued a weaker economic forecast for 2008, predicting slower growth, higher unemployment and higher inflation for the rest of the year. Some economists believe that the report indicated another interest rate cut is on its way.

An interest rate cut usually sends the dollar lower - and oil prices higher - as investors sell dollar-denominated securities and buy commodities as a hedge.

Also, oil is priced in dollars worldwide, so a falling dollar provides less incentive for oil-exporting counties to increase output, or for foreign consumers to cut back on oil use.

"It's a double-edged sword," said Flynn, who noted that when the Fed says the economy is bad, oil prices should go lower. But the Fed's solution to the weak economy - interest rate cuts - sends oil higher.

"So bad news is bullish news for oil," added Flynn.

After oil prices topped $100 a barrel for the first time on January 3, they pulled back to the mid-$80 range amid fears of a recession in the United States, the world's largest economy; however, oil prices have risen again by nearly $14 a barrel in the past few weeks.

Oil prices have risen nearly five-fold since 2002. Most analysts blame rising demand and tight supply. That has also attracted floods of investment money, and exaggerated the effects of supply disruptions.

Oil breaks $100, hits new all-time high

Crude soars as investors weigh the possibility of OPEC production cuts; Texas refinery explosion may have also lifted prices.

NEW YORK (AP) -- Oil prices hit new record highs Tuesday as a Texas refinery fire and fears of an OPEC production cut pushed crude to settle at over $100 a barrel for the first time ever.

U.S. crude for March delivery jumped $4.51 to settle at $100.01 a barrel on the New York Mercantile Exchange, topping the previous settlement record of $99.62 set Jan. 2.

Oil also hit a new all-time trading high of $100.10 a barrel, besting the previous high of $100.9 set Jan. 3.

A weekend refinery explosion in Texas and the possibility that OPEC will cut production next month are driving prices higher, although analysts say there isn't a single factor to explain the move.

The refinery in Big Spring, Texas is owned by Alon USA. It processes nearly 70,000 barrels of oil a day. Officials say it could be closed for as long as two months.

"The refinery fire in Texas is making people a little concerned," said Michael Lynch, president of Strategic Energy & Economic Research Inc. in Amherst, Mass.

March gasoline jumped 11.4 cents to $2.6078 a gallon, and March heating oil rose 10.41 cents to $2.751 a gallon.

The dollar fell Tuesday, giving investors another reason to buy oil. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

For the moment, investors appear to have put aside concerns about the economy that have sent oil prices down into the mid-$80 range twice since crude peaked above $100 last month. Traders are instead focused on the Organization of Petroleum Exporting Countries, which will meet early next month to map out production plans, and Venezuela, where President Hugo Chavez made conflicting statements this weekend about the country's legal dispute with Exxon Mobil Corp. (XOM, Fortune 500)

OPEC could move to cut production in the second quarter, typically a period of low demand, though many analysts feel that's unlikely. In Venezuela, Chavez said he was not serious about an earlier threat to cut oil sales to the United States, but also threatened to sue Exxon Mobil. The world's largest oil company is fighting Venezuela's nationalization of an oil project, and recently convinced several courts to freeze $12 billion in Venezuelan oil assets.

None of the news is enough to justify a nearly $3 a barrel jump in the price of crude, said James Cordier, founder of OptionSellers.com, a Tampa, Fla., trading firm. Echoing other analysts, Cordier argued that the oil market is in the process of "decoupling" from oil's supply and demand fundamentals. He said investors drawn by the falling dollar and momentum are pushing oil prices sharply higher despite reports last week from the Energy Department, OPEC and the International Energy Agency which all cut oil demand growth predictions for this year.

"Everyone concurs that we've got smaller demand coming in the U.S.," Cordier said.

Retail gas prices, meanwhile, jumped 1.8 cents to a national average price of $3.032 a gallon Tuesday, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, are following oil prices higher. The Energy Department expects gas prices to peak near $3.40 a gallon this spring.

Other energy futures also rose Tuesday. March natural gas jumped 30.1 cents to $8.961 per 1,000 cubic feet. Analysts said prices were supported by forecasts for cooler weather, but that futures were also following oil prices higher.

In London, Brent crude for April delivery rose $3.25 to $98.16 a barrel on the ICE Futures exchange.

My sister can’t manage her money

Finances can be a touchy subject among family members. If you try to offer help, proceed with caution, says Money Magazine’s Walter Updegrave.

Question: My 53-year-old unemployed sister has recently received a small amount of money, probably $5,000 to $10,000. She wants to know how to invest it, but she finds financial matters confusing. I’ve tried to help her before, but like many people who are waiting for the big lottery win, she seems to lack the discipline to manage money effectively. I want to help her, but I struggle advising her and other family members because of the huge gap between my financial status and theirs. Is there some wise advice I can give to someone in her circumstances? –Ken, Colorado

Answer: Your sister isn’t the only one who needs to reconsider how she’s dealing with her shaky financial situation. You do too.

I’m sure it’s frustrating that financial concepts that are so self-evident to you - spend less than you earn and then invest sensibly to build wealth for the future - don’t seem to take with her. But having grown up in a family that struggled financially, I can tell you that it’s no easy task to apply these ideas to the reality of your life when you’re having a hard time just scraping by day to day.

You’ve got to realize that helping your sister become more financially secure isn’t just a matter of imparting financial wisdom. If you want to help her change her behavior and improve her situation, you’re also going to have to be patient and sensitive to what she’s going through.

So with that in mind, what sorts of things should you be doing to help out your sibling financially?



Long-term investing
Let’s start with her windfall. If after talking to your sister you think there’s a realistic chance that she’ll be able to invest some of this money for the long-term, then you should help her get it into an investment that requires very little attention on her part, most likely an asset allocation or target-date retirement fund. This way she gets a fully diversified portfolio with no effort on her part. You can find asset allocation funds by typing asset allocation into the Quotes box at Morningstar.com. For a target-date retirement fund, check out our Money 70 list of recommended mutual funds.

But given your sister’s precarious financial situation, I think there’s a good chance she won’t be able to take the long-term approach with this money. I suspect she’ll have to draw on it fairly regularly for any number of reasons. If that’s the case, then she probably should have all or nearly all of it in an investment that offers security of principal and relatively easy access.

Liquid cash
Normally, I’d say a money-market fund would fit the bill, but you don’t want to make it too easy for her to get at this money. So you might recommend that your sister put a portion of her windfall in a money-market fund and spread the rest among CDs with maturities ranging from six months to two years. This way she can get to the CD money if she really needs it, but the prospect of being docked for an early-withdrawal penalty may make her less apt to raid the CDs for anything less than a true emergency. And if it turns out your sister does need some of her CD funds, then at least dividing the money among several CDs instead of putting it all in one would save her from having to pay the prepayment penalty on her entire stash.

Without being too pushy, you should try to help your sister set up these accounts. Otherwise, it might not get done. Earning a high return isn’t your top priority here; making sure the money makes it into the accounts is. But you and your sister can assure that she at least gets a competitive return on this money if the two of you sit down together and check out CD rates here and money-market fund yields here.



Planning for the future
After your sister finds work again, try to encourage her to begin saving on her own so she’ll have something to support her in retirement besides Social Security. If her next job has a 401(k) plan - and you can suggest that she look for one that does - try to persuade her to contribute at least enough to get any matching funds her employer may offer. If she doesn’t have access to a 401(k), then recommend that she contribute to an IRA.

Depending on how much she earns and how much she contributes to a 401(k) and/or IRA, she may be able to qualify for a Retirement Savings Contribution tax credit, which would lower her tax bill and make it more palatable for her to save. (For details on this credit, which maxes out at $1,000 for individuals and $2,000 for married couples, click here.)

Again, I think the chances of her pulling this off will increase dramatically if you actually guide her through the process of opening the accounts and help her choose the investments. But you also have to consider the possibility that you simply may not be the right person to help your sister. She may feel uncomfortable or embarrassed at being in the position of having to take financial advice from a sibling.

If that’s the case, you may be better off buying her some time with a financial planner who can go over her finances with her and get her started on a savings and investment plan. While most planners prefer long-term relationships, there are some who will work on an hourly or project basis, which would probably be more appropriate in your sister’s case. You can contact planners willing to work on that basis by clicking here.

There’s no guarantee that any of these suggestions - or for that matter, any other strategies - will work. But I don’t think it’s a waste of time to try. If you succeed, your sister will be better off financially. If you don’t manage to help her improve her financial situation, I think you’ll both still feel better than if you hadn’t tried at all.

Loan crisis goes to college

Paying for college could get even tougher this year as smaller lenders tighten standards and raise rates. But big banks are holding the line.


NEW YORK (CNNMoney.com) -- The credit crunch is hitting the college classroom.

When parents and students try to line up college funding this spring, they will likely be in for a nasty shock. They may still get a loan, but it will come at a price. Borrowers will have a more limited choice of lenders and find discounts for on-time payments or direct debit scarce. On top of that, they'll see higher rates and fees.

The credit crisis, which started last year with mortgages and has bled into many other areas, is now affecting student loans. Many lenders, particularly smaller companies not affiliated with banks, are finding their main source of funding for private student loans cut off as investors balk at buying securities backed by these loans. This will force some to boost interest rates on private loans by up to 1 percentage point, raise minimum credit scores to 650 and require parents to co-sign the loans, experts said.

"If lenders are not able to securitize, they are not getting the capital to make new loans," said Mark Kantrowitz, who runs FinAid.org, a college funding Website based in Cranberry Township, Pa. "It's an issue of liquidity and cost of capital."

On top of this, legislative changes enacted by Congress last year have sent some lenders fleeing from the federal student loan program. Lawmakers reduced the subsidy lenders receive for making government-backed loans.

While the interest rates on federal loans are set annually by the government, many lenders will stop waiving origination fees and cut out the discounts offered borrowers after they start repaying the loan, boosting the overall cost.

Private loan problems

With little or no profit to be made in the federal loan arena, some smaller lenders are exiting the business, while others are shifting their focus to the more lucrative private loan industry. Others, however, are curtailing even their private loan originations.

San Diego-based College Loan Corp., the eighth largest federal loan originator in 2006, recently announced it would stop making these loans as of March 1, though it will continue originating private loans. Lincoln, Neb.-based Nelnet Inc. (NNI) last month issued a statement saying it would "be more selective" in the loans it originates as it lays off 300 people, or 10 percent of its workforce. And on Tuesday, the Michigan Higher Education Student Loan Authority said it would stop making private loans, known as MI-LOAN.

"It's an area of concern, both in terms of the number of players and the cost of loans that students have to pay," said Tom Joyce, a spokesman for Reston, Va.-based Sallie Mae, the nation's largest lender formally known as SLM Corp (SLM, Fortune 500).

As college costs skyrocket, a growing number of parents and students rely on private loans to cover the gap between tuition and federal loans, which are limited to between $3,500 and $5,500 a year. Private loans made up 24% of education borrowing in 2006-07, up from 6% a decade earlier, according to the College Board, a New York City-based nonprofit higher education access group.

These loans, however, are much more expensive than their government-backed peers and will become even more so. For 2008-09, students will pay a fixed 6.0% on a subsidized federal loan, while the rates on private loans are as high as 13%, depending on the borrower's credit profile, and are inching upward, according to Kantrowitz. Rates on private loans change quarterly or annually, and two-thirds of borrowers pay the highest rate, he said.

"Most students will be able to get them, but they will have to be careful," said Sandy Baum, senior policy analyst at the College Board. "There will be an even greater risk of high interest rates and unfavorable terms."

Higher margins, more interest

While costlier for borrowers, the higher margins on private loans are attracting more lenders with the wherewithal to make these loans.

Private loans, for instance, made up 31% of Sallie Mae's $25.5 billion in originations in 2007, up from 20% five years earlier. The company, which suffered recently after a buyout by J.C. Flowers failed, is close to securing $35 billion in financing to carry it through the next school year. It plans to focus on the higher-margin private loan market.

JPMorgan Chase (JPM, Fortune 500) said the recent wave of failed auctions for investments backed by student loans won't affect its operations. The bank keeps its loans on its books so it is not affected by the securitization freeze. Like other big banks, Chase is not planning to raise its rates.

Chase is actually expanding its student loan operations because it has low defaults and puts the bank in touch with young people to whom they can pitch other products. In the fall it hired 140 people from struggling Nelnet and continues to add to the staff.

Blue chips that can ride out a recession

Solid stocks have been dragged down along with troubled shares. Learn to spot the bargains.

(Money Magazine) -- Really bad stock markets knock down shares of all kinds. That's essentially what has been happening since the start of 2008, as subprime fallout led to recession anxiety. But not every market sector faces the same problems and uncertainties.

Even if we are in a downturn, many companies will come through with their long-term prospects untarnished. Scoop up such stocks while their prices are depressed, and you have a real chance to boost your returns.

The way I see it, the stock market now is actually three markets. First, there are companies that depend on borrowing and lending, including home builders and makers of big-ticket consumer items that typically require financing, as well as bank stocks. Their shares all posted double-digit losses last year.

Yes, the stocks are starting to look like bargains, and the Fed's aggressive interest-rate cutting should eventually spark a recovery. But I'd be worried about buying in too early: The final chapter of the subprime story isn't written yet.

At the other extreme, inflation-sensitive sectors, such as energy and other commodities, have boomed for several years running. But they've had sizable losses so far in 2008, they're still relatively expensive, and they could stay down for a while if demand for raw materials falls in a slowing economy.

Finding the best deals
That still leaves a big swath of stocks whose share prices are down but which are unlikely to suffer lasting damage from the subprime flu or any mild cold the economy catches. The industrial, technology and consumer sectors all fall into this category.

In particular, companies that derive a large percentage of their earnings from outside the U.S. have the best chance of riding out a bad domestic economy. For example, two of the stocks I recommended in last month's column - Hewlett-Packard (HPQ, Fortune 500) and 3M (MMM, Fortune 500) - get at least 60% of their sales abroad.

Spotting true bargains during this downturn is no layup, though. Price/earnings ratios based on anticipated results may be misleading, for instance, because growth may not come through as expected this year. So make sure that a stock also looks cheap compared with its peers based on P/Es using 2007 earnings.

Another smart way to compare stocks is by ratios of price to cash flow (the cash per share a company actually generates each year). The reason: Cash figures tend to be less volatile than earnings.

Three stocks to watch
In doing a little bargain hunting among stocks in the Sivy 70, I found three that have solid prospects, trade at P/Es below 15 based on 2007 earnings and are priced at less than 10 times cash flow. Those multiples count as cheap by anyone's calculations.

DuPont (DD, Fortune 500) announced 27% earnings per share growth (excluding one-time items) in the fourth quarter and recently raised its earnings targets for 2008. How does a company in a cyclical industry such as chemicals buck a U.S. recession? Almost two-thirds of sales come from overseas, where they are growing up to 20% a year in countries such as Brazil, China and India.

The hottest part of DuPont's business has been agricultural products, boosted by rising food prices and demand for ethanol. That division, which accounts for almost a quarter of sales, is growing twice as fast as the rest of the company. As an added bonus, DuPont shares yield a very healthy 3.8%, making them a great choice for retirees.

Fortune Brands (FO, Fortune 500) is a conglomerate with top-name consumer brands, including Jim Beam bourbon and Titleist golf balls. The company also has a home and hardware division, which consists of product lines like Moen faucets. Those businesses have been suffering because of the bad housing market. As a result, the stock has fallen close to a 52-week low of $66, down from a high of $90. That looks like too much punishment for limited housing exposure. Besides, Fortune is restructuring to trim costs, downsizing its home and hardware division and selling its wine business. As a result, the company took a large write-down in the fourth quarter.

But long-term growth has averaged 9% annually and is projected to continue at that rate over the next five years. Add in the stock's solid 2.6% yield, and you have double-digit return potential.

IBM (IBM, Fortune 500) reported terrific fourth-quarter results. Earnings per share were up more than 20% on a 10% rise in sales. A third of the increase in per-share profits was the result of 2007 stock buybacks totaling almost $19 billion. The rest of the profit gain was mostly from IBM's extensive business outside the U.S., which now accounts for almost two-thirds of total sales.

The company is enjoying especially strong growth in Asia and some developing markets. Bookings for service contracts in 2008 are also several billion dollars above expectations, and IBM has raised earnings projections for 2008. As Big Blue goes global, seems like it would deserve a market-beating multiple.

Stocks we love

Forget flowers and chocolates. Our Valentines should make you money. Check out our picks for this year's most lovable stocks.
By Ben Rooney, CNNMoney.com staff writer

How we chose the stocks
In honor of Valentine's Day, we carefully selected five stocks that will make your portfolio swoon. We screened thousands of stocks to come up with the most appealing combination of earnings and sales growth, reasonable valuations and some of the sexiest balance sheets around.
But we know how easy it is to get your heart broken in a market as volatile as this. So we picked stocks that we think you'll want to commit to for the long term.
If you want some financial love this Valentine's Day, look no further.
Garmin
(GRMN) P/E: 18.4, EPS Gr: 19% Just as you can count on Garmin's global positioning systems to prevent you from getting lost, you can probably depend on Garmin's strong market position to keep you from a loss in your portfolio.
Yes, the stock has slipped recently due to competition from rival GPS makers and fears that an economic slowdown will crimp sales. These are valid concerns but one analyst thinks the sell-off is overdone.
"While we can't ignore the possibility that a U.S. economic slowdown could affect Garmin, we believe any impact is likely to be more modest than the current share price suggests," wrote Needham analyst Richard Valera in a research note.
Also, Garmin announced late last month it will enter the smartphone market with its nüvifone. The device will feature GPS, of course, as well as mobile Web-browsing capabilities.
Though some questions remain about which carrier will support the gadget and how much it will cost, the nüvifone has strong potential, according to Deutsche Bank analyst Jonathan Goldberg. "All in all, we believe Garmin has released an intriguing teaser," he said.
Laboratory Corp of America
(LH) P/E: 16.5, EPS Gr: 15% LabCorp's allure is undeniable to investors looking for strong growth.
The nation's second-largest independent clinical laboratory company captured our hearts when it announced recently that it expects 2008 net income to be in the range of $4.74 to $4.90 per share. Wall Street analysts were expecting 2008 earnings of $4.15 per share.
Among LabCorp's many charms: the company reported healthy cash flow in its last quarter, is expected to complete three acquisitions by the end of the first quarter and is likely to continue its aggressive share repurchase activity.
"Investors should take solace that the slowing economy has not significantly affected clinical laboratory operations and that [LabCorp.'s] focused strategy is poised to yield strong returns in 2008," wrote Bank of America analyst Robert Willoughby in a recent research note.
Nike
(NKE) P/E: 17, EPS Gr: 14% We've had a long-term love affair with Nike. The athletic apparel maker made our list of "Stocks we love" in 2005, back when the company's international exposure first stole our hearts.
Since then, Nike has continued to see strong growth overseas, particularly in China, but domestic sales have held up surprisingly well despite economic instability. In its most recent earnings report, the company said U.S. revenues increased 7%.
"Nike is best positioned to weather the storm given its premier brands, global reach and consistently solid execution," JP Morgan analyst Robert Samuels wrote in a recent research note.
What's more, Nike stands to benefit from a number of large sporting events this year. Both the Beijing Olympics and the European Soccer Championships will provide huge sales opportunities for new products that Nike has in store.
Precision Castparts Corp
(PCP) P/E: 16, EPS Gr: 20% Precision Castparts may not be the sexiest stock on our list but the company's financials are are certainly eye-catching.
The maker of aerospace and automotive components said profit jumped 55% in its fiscal third quarter, which ended in January. The company cited strong sales across all major segments. And like the other companies on our list, Precision Castparts is well positioned to withstand an economic slowdown.
Demand for aerospace components remains robust despite the gloomy economic climate, according to JP Morgan analyst Joseph Nadol.
What's more, the stock trades at a discount to its industry counterparts. Nadol thinks it deserves to trade at a higher valuation than its peers.
"We believe Precision Counterpart's much higher than average growth rate, driven by smart acquisitions, efficient operations, and increasing market share justify a premium to the group," Nadol wrote in a recent research report.
Tata Motors
(TTM) P/E: 15.8, EPS Gr: 20% Tata Motors, India's largest automobile company, is our long-distance lover.
The stock is listed on the New York Stock Exchange as an American Depository Receipt (ADR), which means investors in the U.S. can buy Tata shares without having to open an Indian investment account or worry about exchange rates.
Tata made headlines recently when it unveiled the world's cheapest car, the Nano, which sells for as low as $2,500. With the Nano, Tata could tap into the rapidly growing market of middle-class buyers in emerging economies like India and China.
Also, Tata has a number of promising acquisitions and partnerships in the works. Tata is in talks with Ford to buy the American carmaker's Jaguar and Land Rover brands. And the company's manufacturing subsidiary recently signed a deal to produce parts for Boeing's 787 Dreamliner.

Bidville and beyond: EBay refugees' options

Even Amazon says it's seen a spike in seller registrations since word broke of eBay's controversial new policies.

More than 350,000 sellers are registered on Bidville, but 25,000 active accounts provide most of the site's 1 million listings, Hoffman said.
Overstock - the site best known for liquidating retailers' excess inventory at low, fixed prices - also sees opportunity in eBay's new policies.
Following eBay's announcement last week, the Overstock (OSTK) team worked through the weekend to design a new strategy highlighting its lesser-known auctions space, said Overstock CEO Patrick Byrne.
The result? Overstock, in Salt Lake City, will redesign the header on its homepage to direct more traffic to its auctions tab. It plans to accelerate a software rollout that will beef up its auctions community message boards - and it's laying plans to produce 15-second Internet commercials to get the word out.
"We think the time is right to position ourselves in this category," Byrne said.
Even Amazon has noticed an uptick in new seller accounts in the last week. Best known in its early days as an online bookstore, Amazon (AMZN, Fortune 500) expanded into consumer electronics and other categories, and in 2000 began allowing third-party sellers to list their wares alongside Amazon's offerings. All products are offered at a fixed price.
Today, 26% of all items sold on Amazon come from its 1.3 million third-party sellers, who range from mom-and-pop vendors to Target Corp (TGT, Fortune 500).
Amazon refrains from offering auctions because its buyers and sellers prefer the convenience of a set price, according to business solutions general manager Matt Williams. Amazon has devised a number of different rate programs for sellers; one takes a percentage of gross revenues, while another charges a referral fee per item.
"We've certainly heard of frustration with other marketplaces, and we've seen a significant increase in registrations," said Williams.
Longtime eBay seller Debi Lee said Amazon has worked well for certain items in her repertoire. She tired of eBay's tactics and now uses the site primarily to educate consumers about her products, which include silk clothing for plus-sized women. Lee has also launched her own Web store and advertises through Google's AdWords, where she pays only when consumers click on her ad.
The Google question
A number of sellers are clamoring for Google (GOOG, Fortune 500) to launch an auction site, and Lee said she might conside that option if it were available. Lee also plans to investigate Buy.com and Etsy, which focuses on handmade crafts.
"Why sell only through one venue?" said Lee, of Oakland, Calif. "Those 100%-reliant on eBay for their livelihood will now understand that folly."
Google is being customarily tight-lipped about any plans to examine the auction space. "We don't comment on market rumor or speculation," said a company spokeswoman.
How Google can make - or break - your company
Yahoo retired its U.S. and Canadian auction sites in June 2007, but it still operates Yahoo Auctions in select Asian markets. Company spokeswoman Diana Wong declined to speculate on whether Yahoo (YHOO, Fortune 500) might get back into the U.S. auctions business.
Representatives of Microsoft (MSFT, Fortune 500), which last week launched a $44 billion bid to buy Yahoo, also declined to comment.
Meanwhile, eBay's corporate response to the seller backlash is to downplay it.
While sellers are burning up Internet forums, including FSB's discussion board, with vitriolic criticism of the planned new policies, eBay spokesman Usher Lieberman said sellers' reactions in eBay's town hall forums have been "balanced."
"The community understands the rationale behind these changes," he said.
At the same time, Lieberman acknowledged that eBay's sellers are, first and foremost, entrepreneurs.
"They have a lot of different channels available to them, and we expect they're evaluating what the changes mean for their business," he said.

EBay rivals circle vulnerable auctions kingpin

Sellers fleeing eBay are flocking to a crop of upstarts.

(FORTUNE Small Business) -- In the online auction space, "eBay" is a verb. Since launching in 1995, eBay (EBAY, Fortune 500) has been the online marketplace for people seeking to unload or pick up anything and everything.
But a week after eBay announced massive changes to its fee structure and its vaunted feedback policy, competitors say the behemoth seems suddenly vulnerable. Outraged sellers have begun seeking new outlets to hawk their products, and alternative marketplaces are seeing significant jumps in new-user registrations.
OnlineAuction.com, based in Grants Pass, Ore., reports that roughly 7,500 new sellers have opened accounts since eBay announced its new policies last week. That's a 15% jump in the site's user base, within a matter of days.
"eBay has dropped the ball, and there's a huge window of opportunity," said OnlineAuction CEO Chris Fain.
Another contender, eCrater, has registered 1,400 new sellers within the last few days. That's more than double the site's average weekly total.
"They call and introduce themselves as eBay refugees," said eCrater founder Dimitar Slavov.
Creators of eBay alternatives say their time has come.
"People are seeing the light, and it's very exciting," said OnlineAuction's Fain, who is a former eBay "PowerSeller," eBay's designation for its highest-volume sellers.
Fain's sales of vintage watches and specialty cars reached $1 million a year on eBay, but he became disenfranchised with the company's steady rate increases.
"I was paying eBay $7,000 to $8,000 a month in fees," said Fain, who launched OnlineAuction in 1998 but continued selling on eBay until 2005. "They were taking too big a piece of my bottom line."
While eBay charges sellers a percentage of an item's final sale price, OnlineAuction refrains from taking a cut. Instead, it allows vendors to list as many items as they want for a flat membership fee levied on a monthly or yearly basis.
"We're the Costco (COST, Fortune 500) of online auctions," Fain said.
Should OnlineAuction reach the 250 million-strong user base that eBay currently holds, the company could be "six times more profitable without being as greedy," Fain claims.
He estimates that 85% of OnlineAuction's sellers are eBay defectors. The site now has 50,000 sellers, with more than 11 million items currently listed.
That's still a mere fraction of eBay's 113 million items, Fain admits.
"Because eBay is such a huge entity, it's hard to compete unless you get the people behind you," Fain said. "But that's what's happening right now."
Sellers seek alternatives
Part-time vendor David Cox is one of those people. Last week, he concluded a 10-year run selling computer accessories on eBay and opened an $8-a-month account with OnlineAuction. Cox, of Marble Falls, Ark., said his new home reminds him of eBay's early days.
"I feel they will be more responsible to me as the seller," Cox said. "It certainly won't have the market that eBay does now, but I'm positive in time buyers will migrate to other sites."
Cox plans to also check out eCrater, which allows sellers to use its marketplace free of charge. ECrater founder Slavov said vendors will never be asked to pay anything.
"There are too many fees on eBay and Amazon," said Slavov, a software developer who launched eCrater in 2004. eCrater, based in Irvine, Calif., turns a profit by charging vendors for premium positions, selling Internet advertising and partnering with Google Checkout.
ECrater now has 33,000 active sellers and lists nearly 1 million items, according to Slavov.
Another upstart attracting attention from fleeing eBayers, San Francisco's iOffer, is built around a focus on friendly engagement between buyers and sellers. In lieu of using an auction format, iOffer has sellers state a starting price or ask buyers to make an offer. Both parties negotiate until they're satisfied.
"Overall, I'd say sellers like being more interactive," said iOffer CEO Ryan Boyce. "There's more flexibility, and you can sell a lot more when you engage with the buyer."
Listing items on iOffer is free. Final value fees are levied on a sliding scale but are significantly lower than eBay's, Boyce said.
Also a plus for former eBayers: Sellers can transfer their eBay feedback scores to iOffer.
"They're not starting from zero," Boyce said. Another iOffer feature allows users to trade items.
"With the recession, people don't have as much free cash lying around, so swapping has become more popular," he said.
iOffer has accumulated 75,000 sellers and nearly 1 million total users since its 2002 launch.
Another auction site, Chicago-based uBid, targets bulk sellers liquidating excess inventory. Its 7,000 participants include Sony (SNE), Motorola (MOT, Fortune 500) and Dell (DELL, Fortune 500). All sellers submit to a 10-point financial exam to ensure they're qualified to do business on the site: "That's part of our stringent anti-fraud stance," said uBid CEO Jeff Hoffman.
However, uBid is not a viable alternative for eBay vendors who aim to sell products at or close to retail price. Most uBid auctions start at $1 and carry no reserve price.
"If your eBay store is the way you feed your family, you sell for profit," Hoffman said. "Ubid is for asset recovery on products that aren't selling at retail."
On the other hand, the auction site Bidville, which uBid purchased in 2006, does focus on what Hoffman calls "consumer-to-consumer" sales - the market eBay now dominates. Listing an item is free, and final value fees start at 5% for items under $25. For items that sell for $1,000 or more, sellers pay a flat $25 fee plus 1% of the amount over $1,000.

EBay's PayPal funds freeze plan draws fire

EBay's new policy of holding PayPal funds on "high-risk" transactions for up to 21 days has business owners spooked.

(FORTUNE Small Business) -- In the uproar that erupted over the planned fee hikes and other policy changes eBay announced last week, one drew particular ire and incredulity: eBay's plan to hold payments sent through its PayPal payment service for up to 21 days in certain circumstances.
The freeze will apply to transactions eBay (EBAY, Fortune 500) considers high-risk, and is intended to protect buyers from the hazards of a bad transaction. By hanging on to funds, eBay can easily refund them if a seller doesn't ship a purchased item or sends damaged goods.
What is sparking reactions ranging from annoyance to panic among some of eBay's sellers is the company's criteria for determining what transactions fall into the "high-risk" category. Factors beyond sellers' control, including the number of "feedback" comments they have from previous buyers and how many of those comments are positive, can trigger the freeze.
"It's like a bad dream, really," said Dana White, an eBay seller who lives outside Ocean City, Md., and deals in used clothing, shoes and accessories. "I'm a small seller. All I need is two negatives in a 30-day period, and they will hold funds."
Representatives from PayPal, which eBay acquired in 2002, declined to comment on how the new policy would affect individual cases, but noted that the changes are paired with increased protections for merchants who use the service.
If Paypal deems a transaction fraudulent, it currently covers merchants for up to $5,000 per year. That cap will be lifted for eBay's PowerSellers, the site's highest-volume merchants, who will now receive unlimited coverage. PayPal will also offer PowerSellers protection on items sent to any address (not just confirmed addresses, the current policy) and expand its merchant coverage for international sales.
PayPal estimates that its new hold policy will affect less than 5% of eBay transactions, and it emphasizes that only relatively untested sellers risk incurring a freeze. Merchants who have been registered with eBay for more than six months, have a feedback score of 100 or higher (meaning they've received positive comments for at least that many transactions), and have a "dissatisfied buyer" rate of less than 5% will never have their funds held.
But on a site that hosts an estimated 113 million listings worldwide at any given time, a policy affecting as many as 5% of those transactions puts millions in jeopardy. If funds are frozen after a sale, PayPal will release them after the buyer leaves positive feedback, three days after the item's confirmed delivery, or at the end of 21 days without a dispute, whichever happens first.
Paypal says the factors that will play into its formula for triggering a hold include the length of time a seller has been on eBay, the seller's feedback rating, and the final cost and shipping fees for the item.
Because PayPal has sole discretion over whether to freeze funds, sellers are upset about a perceived lack of accountability. They're also grouchy about eBay's efforts to force buyers to rely on PayPal: in some categories and for all new sellers, eBay requires vendors to offer PayPal as an option or have their own merchant credit card account. The site has blocked rival payment systems such as Google (GOOG, Fortune 500) Checkout, saying they are not yet proven safe.
A new lending option: Virgin Money
"The feeling among my forum members is that this new [21-day hold] policy is beneficial for buyers but negatively affects sellers," said Bob Lee, who runs PowerSellersUnite, a popular outlet for entrepreneurs who run businesses on eBay. "A seller is at risk of being taken advantage of by the buyer. Not having access to revenue and having to wait for a buyer to leave positive feedback leaves sellers in the lurch. PayPal and eBay are not allowing sellers to play on a level field."
The new policy has some questioning its legitimacy: Can PayPal legally freeze funds at will for up to three weeks?
The answer is yes. While PayPal offers interest-bearing accounts, debit cards, and other trappings traditionally associated with banks, it legally isn't one.
PayPal is classified as a "deposit broker," according to David Barr, a spokesman for the Federal Deposit Insurance Corporation (FDIC). A deposit broker can perform some of the same functions that bank might, but it ultimately depends on banks to hold its money. Other examples of deposit brokers include companies like Charles Schwab (SCHW, Fortune 500), the discount brokerage house.
Buyer and seller money passes through PayPal - "a conduit, so to speak," Barr said - and is then deposited in a traditional bank. That means money parked with PayPal can be eligible for so-called "pass-through" insurance by the FDIC. However, that protection doesn't apply to funds held in a PayPal money market account, which are not FDIC-insured. (Coincidentally, PayPal money-market holders were recently issued incorrectly low January dividends, but that mistake stemmed from a third-party glitch and is now being corrected, according to a PayPal representative.)
While PayPal's operations lie outside of U.S. federal banking regulations, states can individually decide to regulate the company - and in the past some have made overtures in that direction. In 2002, Louisiana banking officials asked the company to cease offering its services to the state's residents until it received a money transmitter's license. PayPal did, and hasn't faced any significant state-level action since. A spokeswoman for the Louisiana Office of Financial Institutions confirmed this week that PayPal is a registered money transmitter with the state.
Some sellers have talked of challenging PayPal money freezes in courts, something that's been done before. In 2002, PayPal users in California sued, arguing that PayPal violated the state's consumer-protection laws by locking accounts containing money involved in a fraud investigation. (PayPal froze all cash in affected accounts, not just the money involved in the investigation.) However, the case did not result in any determination of liability: PayPal paid a $9.5 million settlement to end the case in 2004.
PayPal spokeswoman Amanda Pires said the issues at stake in the California case were "totally unrelated" to those being raised in relation to the new 21-day hold provision.
"Obviously, it's legal. We wouldn't do it if it wasn't," Pires said of the provision, noting that the right to temporarily hold funds is reserved in PayPal's user agreement.
PowerSellersUnite's Lee conceded that point: "Everyone who joins PayPal agrees to their terms. Unless a court finds PayPal subject to the same regulations as a bank, it would be a hard case to make."
PayPal's Pires says the changes will increase buyer confidence and generate more sales for eBay's merchants. Some eBay entrepreneurs agree with that assessment.
Jon and Stacie Sefton are the owners of B & H Factory Outlet, a Cedar Rapids, Iowa, designer-clothing retailer that sells exclusively on eBay. What began as a home business five years ago now has 70 employees and is eBay's largest clothing merchant. The Seftons are in favor of PayPal's new policies, and believe the changes will achieve PayPal's aim of boosting protections for both buyers and sellers.
Unlimited partnership: Couples in business
B&H does 20% of its business internationally, so PayPal's expanded global protections will directly benefit the company's bottom line, as will its move to expand PowerSeller protections for shipments to any address, not just confirmed ones. Overall, Paypal's effort to weed out unreliable sellers helps everyone who does business through its marketplace, Jon Sefton said.
Also backing the changes is Jonathan Garriss, CEO of eBay shoe store Gotham City Online and executive director of the eBay Professional Sellers Alliance, an influential outside lobbying group.
"That is a big deal because now eBay and PayPal are getting involved in the transaction to make sure buyers get what they are expecting," Garriss said.
His group has long been frustrated by the hands-off, "buyer beware" stance eBay's management has traditionally had about its marketplace: "Imagine if that was the case at the local mall," Garriss said. "That's no way to shop."
But eBay's PayPal changes have already cost the company Suzy Lancaster, a 52-year-old seller from Wichita Falls, Tex., who has been selling on eBay for more than a decade - or, as she puts it, since "back when [eBay founder] Pierre Omidyar started it as Auction Web and ads looked more like e-mail." Lancaster remembers the days when bidders sent cash to sellers through the mail to pay for their purchases.
After last week's announcement of eBay's upcoming policy changes, she closed her Pigeon Alley Books store on eBay and began working on a standalone e-commerce website. EBay's PayPal changes will make small sellers even more vulnerable to unscrupulous buyers, because they will have every incentive to avoid getting dinged with bad feedback that might trigger a freeze on their PayPal account, she said.
"We've spent years trying to build up a good business reputation," she said. "It's going get shredded by someone who doesn't realize [the impact of their feedback]."
Lancaster echoed a common sentiment expressed by eBay business owners in this week's uproar: concern that the site is transitioning to a marketplace only for professional sellers, with no room for smaller vendors or hobbyists. John Donahoe, elevated to CEO-elect two weeks ago when Meg Whitman announced her impending retirement, fed those fears with an oft-repeated dismissive comment to the Financial Times in December, complaining that "our home page still looks like a flea market."
Lancaster said she is sad to see eBay becoming a marketplace only for businesses that "buy inventory by the boatload."
"They already have a place for that," she said. "It's called Wal-Mart (WMT, Fortune 500)."