Financial life in a big town

Partial payments for people claiming that the withdrawn painkiller Vioxx caused heart attacks will go out starting Aug. 28, under the $4.85 billion settlement between drugmaker Merck & Co. and plaintiffs’ lawyers, the claims administrator said Wednesday.

Those payments will amount to about 40% of each plaintiff’s estimated total payout, but it’s unclear how many people will be receiving checks from the first batch going out.

The settlement, meant to end the bulk of personal injury lawsuits against Whitehouse Station, N.J.-based Merck, was reached last November. Merck had pulled Vioxx from the market on Sept. 30, 2004, after its own research showed the once-blockbuster arthritis pill doubled the risk of heart attack and stroke.

During the monthly status conference with the New Orleans federal judge who is coordinating most of the massive Vioxx litigation, Orran Greer of claims administrator BrownGreer PLC said 49,954 eligible claimants have now registered for a settlement. That amounts to more than 97% of claimants eligible for the settlement - well above threshold levels the company required for the deal to proceed - and most of the others cannot be located by their attorneys, Greer told U.S. District Judge Eldon Fallon.

Greer said Merck waived its right to walk away from the settlement on Aug. 4 and, over the next 2 days, deposited $500 million in an escrow account and gave the claims administrators a letter of credit worth up to $4.1 billion to cover payments to claimants.

His firm is now painstakingly reviewing millions of pages of documents submitted by claimants, electronically or on paper, for accuracy and to make sure that no documents - particularly those releasing Merck from any future legal liability - are missing or incomplete.

Lynn Greer, also of BrownGreer, said 44,680 claimants have submitted at least some of the required materials, and those missing items are being notified. She said 3,441 claimants have reached the stage where administrators are determining how many points they get toward a settlement amount - decided by a complicated formula that factors in how serious a claimant’s injury was, how much Vioxx was taken and how many health risk factors the person had.

"Our projected value of each point [is] in excess of $1,900," she said, adding, "it is unprecedented that claims can begin going out in an 8-month period" since the complex settlement process began.

The 4-year legal saga begun when Merck yanked Vioxx off the market, triggering tens of thousands of lawsuits, damaging Merck’s once-spotless reputation and forcing out its then-chief executive.

Settlement amounts can run from the minimum of $5,000 up to a couple of million dollars, but the federal government is arranging to be reimbursed for care provided to Vioxx users under the Medicare and Medicaid programs. Likewise, private insurers are seeking reimbursement, although Fallon has ruled that their claims cannot hold up interim payments to claimants.

Payments to Vioxx users who suffered strokes are set to start in February 2009.

Merck (MRK, Fortune 500) still faces about 260 potential class-action suits, alleging either harm or financial losses related to Vioxx, that still must be resolved, plus 2 cases already certified as class actions in Canada.

The Vioxx case has cost Merck at least $7 billion, including more than $1.74 billion through July 31 on legal costs for defense research and individual trials, most of which it has won.

Vioxx, which was launched in 1999, brought Merck revenue of $2.5 billion at its peak in 2003 and a total of at least $11 billion. 

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Lehman Brothers Holdings Inc is expected to follow in Merrill Lynch & Co Inc’s footsteps and sell a lot of risky assets at a loss. But shedding the assets may create another headache for Lehman — the need to raise large amounts of new capital, including common equity.

Any capital raise would be painful for Lehman and its shareholders, given that the company just raised $6 billion in June and trades at a significant discount to its book value, or the net accounting value of its assets.

But Lehman, the fourth-largest U.S. investment bank, may have little choice as it wrestles with roughly $65 billion in mortgage-related assets, particularly after Merrill Lynch agreed to shed $30.6 billion in toxic assets at a fire-sale price of 22 cents in the dollar, analysts said.

“Lehman’s caught between a rock and a hard place. They’re getting more and more pressure from regulators and investors to add reserves or mark these things down,” said David Hendler, an analyst at independent research firm CreditSights in New York.

“In normal times, they could wait it out, but the market wants it done now,” Hendler added.

The New York Post reported on Friday that Lehman was talking to potential buyers about selling $30 billion in assets. CNBC television reported Friday that Lehman was in talks with BlackRock Inc to sell mortgage securities and other assets. Both Lehman and BlackRock declined to comment.

Lehman’s chief financial officer told Merrill analyst Guy Moszkowski recently that the investment bank was willing to sell assets at a loss if the deal materially reduced risk, the analyst said in a report.

Lehman had roughly $65 billion in mortgage and real estate-related assets on its balance sheet as of May 31. 

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Malaysia's exports rose at the slowest pace in three months in June as shipments of electronics to the U.S. and European Union declined.

Overseas sales increased 18.4 percent from a year earlier to 58.2 billion ringgit ($17.8 billion), the Trade Ministry said in a statement in Kuala Lumpur today. That matched the median estimate of 14 economists in a Bloomberg News survey.

Slowing growth in the U.S., Asia's largest export market, is crimping demand for made-in-Malaysia Intel Corp. computer chips and other electronics. The pace of expansion in Malaysia's $151 billion economy may ease to about 5 percent this year from 6.3 percent in 2007, the central bank said last month.

“You've got an electronics slowdown,'' said Joseph Tan, a senior market strategist at Fortis Bank SA in Singapore. “Invariably there will be a slowdown from the growth that we had last year, because the U.S. is still a very major trading partner for Malaysia.''

Shipments to the U.S. fell 5.8 percent to 7.07 billion ringgit in June from a year earlier on lower exports of electrical and electronics products, the trade ministry said. Sales to the EU slipped 1.7 percent.

The U.S., No. 1 buyer of Malaysian products last year, has fallen behind Singapore in the first six months of 2008.

Economic growth may moderate in the next 12 months, Bank Negara Malaysia said last week. The central bank broke with its inflation-fighting Asian neighbors when it kept rates unchanged at 3.5 percent on July 25, saying its immediate concern was to “avoid a fundamental economic slowdown.'' Inflation jumped to a 26-year high of 7.7 percent in July.

Palm Oil

Overseas sales may weaken further in coming months as easing prices reduce the gains made by Malaysia's palm oil and energy exports so far this year. Malaysia is Southeast Asia's second-largest oil and gas producer and the world's No. 2 palm oil seller.

“Signs are emerging that this commodity boom may soon come to an end as a slower world economy and sky-high prices damp global demand for commodities,'' said Azrul Azwar Ahmad Tajudin, an economist at Bank Islam Malaysia Bhd. in Kuala Lumpur.

Crude oil in New York has slipped more than 14 percent from a record $147.27 a barrel on July 11, and palm oil produced by Sime Darby Bhd. and other Malaysian planters closed below 3,000 ringgit a ton on July 29 for the first time since December.

Exports of palm oil jumped 82.8 percent in June from a year earlier, though they fell 4.2 percent from May. Sales of crude oil climbed 50.2 percent from a year ago, the slowest pace in six months. Shipments of liquefied natural gas rose 60.1 percent.

Sales of Unisem Bhd. semiconductors and other electrical and electronics goods rose 6.5 percent from a year earlier, the smallest gain in three months. Such goods accounted for 38.5 percent of total exports in June, down from 40.4 percent the previous month.

Imports expanded 12.1 percent in June, leaving a trade surplus of 12.97 billion ringgit.

Exports increased 15.5 percent in the first six months from a year earlier. Imports rose 8.3 percent in the same period, leaving a trade surplus of 67.59 billion ringgit.

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Moody’s Corp (MCO.N: Quote, Profile, Research, Stock Buzz), the parent of Moody’s Investors Service, said quarterly profit fell 48 percent, as the global credit crisis caused demand to shrink for mortgage bonds and collateralized debt obligations.

Though results topped forecasts, Moody’s shares gave up some early gains after Connecticut Attorney General Richard Blumenthal said he plans to sue Moody’s and its main rivals, McGraw-Hill Cos (MHP.N: Quote, Profile, Research, Stock Buzz) Standard & Poor’s, and Fimalac SA’s (LBCP.PA: Quote, Profile, Research, Stock Buzz) Fitch Ratings, for alleged “deceptive and unfair practices costing taxpayers millions of dollars.”

Second-quarter net income for New York-based Moody’s, whose largest investor is Warren Buffett’s Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) (BRKb.N: Quote, Profile, Research, Stock Buzz), fell to $135.2 million, or 54 cents per share, from $261.9 million, or 95 cents, a year earlier.

Moody’s said profit excluding items was 51 cents per share. On that basis, analysts on average expected 47 cents per share, according to Reuters Estimates. Revenue fell 25 percent to $487.6 million, topping the average $465.7 million forecast.

“They beat the numbers in pretty much all categories,” said Edward Atorino, an analyst at Benchmark Co in New York. “I think we’re bouncing along the bottom. The third quarter is starting pretty slow, but we’re at the bottom of a trough.”

Results were weakened by a 56 percent plunge in revenue from CDOs and other structured products, including such asset classes as residential mortgage-backed securities, commercial real estate finance and credit derivatives. In the United States alone, structured finance revenue fell 67 percent.

Expenses declined 10 percent as Moody’s cut jobs and reduced incentives and stock-based compensation.

CRITICISM 

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Plane maker Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz) has seen a string of order deferrals in the United States this year as the airline industry battles challenges such as high fuel costs, a senior executive said on Wednesday.

Randy Tinseth, Boeing Commercial Airplanes Vice President for Marketing, said the delays also featured one total cancellation, but the issue was limited to the U.S market — which accounts for 10-11 percent of its sales.

“We have seen deferrals in the U.S. market as the airlines look to make significant capacity reductions, but we are pleased to have regional diversity .. We have not seen deferrals in other regions,” he told reporters.

Boeing shares were up 0.5 percent at $66.45 at 12:08 p.m. EDT.

Airline fuel costs have soared this year alongside record oil prices above $140 a barrel, forcing several airlines to cut capacity and hike fuel charges protect margins.

But Tinseth said Boeing did not expect the tough climate to last — predicting the value of the new plane market to grow in the long term.

Bowing said the group now valued the market for new commercial planes at $3.2 trillion to 2027. That is up from a $2.8 trillion 20-year forecast provided last year.

“The forecast takes into account the industry’s near term challenges, including a slowing worldwide economy (and) surging fuel prices .. This year’s forecast is rooted in today’s realities, but also recognizes the nature of a long term outlook,” Tinseth said. 

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Hewlett-Packard, the world’s biggest computer maker, launched a new generation of touchscreen PCs designed to lift user-friendly computing out of its expensive niche and bring it to a wider market.

The TouchSmart All-in-One allows users to work with photos, music, video, the Internet and television by tapping or swiping the screen, and will be priced at $1,299, HP said at the launch in Berlin on Tuesday.

HP’s Personal Systems group of PCs, notebooks, workstations and handheld devices has transformed itself over the past few years from a largely commoditized volume business to a far more successful one that emphasizes product design.

The group’s executive vice president, Todd Bradley, told Reuters he aimed to set a trend and create a new market.

“We don’t think about this as a niche. We think about it as a global product that will inspire demand and drive desirability,” Bradley said in a telephone interview.

“Our ability to lead is very important,” he added, declining to speculate on what size the market for such PCs might reach.

HP’s announcement came a day after Apple announced a new version of its ground-breaking iPhone, the original version of which brought touchscreens to public attention and sparked a host of imitators.

Bradley denied that HP was following Apple, pointing out that HP had been developing touch technology for some time. But analyst Crawford del Prete of research firm IDC said: “I don’t think Apple’s impact can be underestimated.” 

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The country’s highest court has agreed to weigh in on the $52 billion privatization of phone giant BCE Inc., a transaction that appeared close to imploding after a lower court effectively ruled the phone company’s bondholders had been treated unfairly.

In a victory yesterday for BCE and its buyers, the Supreme Court of Canada said it has agreed to review last month’s unanimous decision by the Quebec Court of Appeal, a ruling that several observers said could have far-reaching implications for future corporate takeovers in Canada.

BCE, which owns Bell Canada, now has one last chance to complete what is being billed as the biggest leveraged buyout ever.

At issue is whether BCE’s board erred in its duties by failing to consider the interests of BCE bondholders when directors accepted a $42.75 per share takeover offer.

The bid was made by the Ontario Teachers’ Pension Plan and United States private-equity firms Providence Equity Partners Inc., Madison Dearborn Partners LLC and Merrill Lynch Global Private Equity.

The current legal thinking on Bay Street has held that a board’s duty is to maximize shareholder value. The appeal court, however, said that the interests of other stakeholders must also be considered in such a transaction.

The bondholders have complained that a leveraged buyout of BCE would load up the telephone company’s balance sheet with too much debt.

That would probably make the investments of the bondholders less valuable.

Both BCE and lawyers representing the bondholders declined to comment on yesterday’s decision, which was released after the markets closed.

"We’re pleased that the Supreme Court granted leave and will hear the case on June 17," said Deborah Allan, a Teachers’ spokesperson.

The court had already decided to fast track the process if permission to appeal was granted.

The timing is important.

BCE investors have been speculating for months that the banks backing the deal – and possibly the buyout consortium itself – are eager to find an excuse to walk away from their commitments, and are therefore unlikely to agree to an extension.

The purchasers have until June 30 to conclude the purchase, which can be delayed only with approval from both sides.

The ongoing credit crunch has raised the cost of borrowing money.

That has made the price of completing the transaction significantly higher than when the deal was inked last June.

Shares of BCE closed at $34.65, down 40 cents, on the Toronto Stock Exchange yesterday, before the court’s decision was made public.

BCE had argued in its submissions to the Supreme Court that a failure to hear the case threatened to destroy billions of dollars of value for the company and its shareholders.

Bondholders, on the other hand, had urged the court not to be swayed by the deal’s size when making a decision on whether to grant a leave to appeal.

With files from The Canadian Press

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OTTAWA–The federal government recorded a $1.2-billion budgetary deficit in March, likely trimming its surplus for the just-completed fiscal year to $10.2 billion.

The Finance Department says the deficit last March was half what the government experienced in March 2007, when it spent $2.4 billion more than it earned.

The department also says preliminary accounting points to a $10.2-billion surplus for the 2007-08 financial year that ended March 31, the exact amount forecast in Finance Minister Jim Flaherty's budget in February.

The federal government's revenues were up $1 billion, or 5.2 per cent, in March, largely as a result of higher receipts in taxes from individuals. Program expenses were flat.

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Canada’s slowing economy is starting to take a toll on homeowners.

"Defaults are rising in certain parts of the country," said Peter Vukanovich, president of Genworth Financial Canada, which insures mortgages against default.

Which parts of the country?

"Here in Ontario and in Quebec," he replied.

The Canadian real estate market is healthier than in the United States, where prices are falling and many homeowners are facing foreclosure.

Still, there’s a concern that some homeowners in Canada may not keep up their mortgage payments if they lose their jobs.

"We’re monitoring losses and making sure the lending is responsible," Vukanovich said.

Homebuyers are required to buy mortgage insurance if their down payment is less than 20 per cent of the purchase price.

Mortgage insurance protects lenders when borrowers fall behind and properties have to be sold at a loss.

Canada Mortgage and Housing Corp., a federally owned Crown corporation, is the largest provider.

Genworth, owned by General Electric Co., is the largest private-sector mortgage insurer.

In its 2006 budget, the federal government opened the mortgage insurance market to more competition.

With competition came innovation. Mortgage insurance providers started underwriting loans with no down payments and with amortizations of up to 40 years.

"The longer amortizations and the 100 per cent loan-to-value products have been relatively popular," Vukanovich said.

But what if Canada’s economy flattens out? How will this affect highly leveraged buyers?

It’s not only CMHC, Genworth and other mortgage insurers on the hook if there’s a rash of defaults.

Taxpayers will also be liable for losses.

Few people know that Ottawa guarantees 100 per cent of CMHC-insured mortgages and 90 per cent of privately insured mortgages (up to $200 billion).

Because of the federal guarantee, mortgage insurers don’t have to carry capital on their books to match their potential risks.

In recent months, the finance department has been holding secret talks with mortgage industry players.

"We consult on a regular basis on a wide variety of issues," said a finance spokesperson.

While Ottawa won’t confirm the discussions, mortgage lenders know they’re going on.

"The degree of risk that’s involved with 40-year mortgages and no down payments is certainly of some concern to the finance department," said Don Drummond, chief economist with TD Bank Financial Group.

"It definitely creates a riskier environment."

Here’s how the risk could play out.

Suppose you bought a home in the Toronto area last year, borrowing the whole purchase price and opting for a 40-year payback. Your mortgage insurance premium added another 3.5 per cent to the loan amount.

Suddenly, you lose your job or have your hours cut back. Or this happens to your spouse.

Within a few months, you can no longer cover mortgage payments.

You think about selling. But you can’t make money because you have no equity and 99.9 per cent of your payments are interest, not mortgage principal.

So, you wait for the lender to take over your house under a power of sale.

Our mortgage lenders are strict about checking credit scores and making sure borrowers don’t take on too much debt.

But there’s a sky-high bill to shoulder if a slowing economy results in mortgage defaults.

It’s time for Ottawa to talk openly about cutting back its mortgage insurance guarantee to adapt to a climate of looser lending.

Ellen Roseman’s column appears Wednesday, Saturday and Sunday.

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So, you want to open a discount brokerage account and manage your own investments.

Which discount broker do you choose? How do you compare them all?

Luckily, you can find a wealth of Canadian information online.

You can start your virtual tour with Surviscor, a consulting firm that regularly reviews and ranks the discount brokerages.

Its winter 2008 survey, posted at www.surviscor.com, compares 16 online brokers operating in Canada.

As well as overall rankings, there are separate rankings for investors and traders. This recognizes they have different needs.

Credential Direct, owned by Canada’s credit unions, gets the top score for catering to investors (7.59 out of 10).

It’s followed by BMO InvestorLine (6.85), Qtrade (6.56), National Bank Direct Brokerage (6.42) and TD Waterhouse (6.37).

Your next stop is the Stingy Investor website. (Go to www.ndir.com and search for Canadian discount brokers). It’s run by Norm Rothery, chief investment strategist at Dan Hallett & Associates Inc.

Here you can find up-to-date comparisons of the fees and commissions charged by 15 Canadian online brokerages (as well as phone numbers and email addresses).

What you pay usually depends on how many trades you make per quarter or year, how many shares you buy at a time and how many dollars you have in assets at the firm.

In the past year, most discount brokers have introduced lower fees for active traders. That’s the good news.

But many brokers also charge penalties – called maintenance fees – for inactive traders, especially those with smaller accounts. So, watch out and ask questions.

The Stingy Investor doesn’t rank discount brokers. But when you read its listings, one firm stands out for simplicity and low fees.

Questrade charges one cent a share, $4.95 minimum to $9.95 maximum, and calls this "democratic pricing."

Maybe you want to hear about other investors’ online trading experiences.

You want to eavesdrop on their conversations.

Thanks to a proliferation of Canadian personal finance blogs, you can have access to other people’s experiences and opinions. But you do need to exercise judgment.

Start with CanadianCapitalist.com, one of the longest-running and active personal finance blogs. Scroll down the right hand side to Categories, then find Investing and Discount Brokers.

You’ll find out why this blogger went to Questrade for rock-bottom trading commissions and then returned to TD Waterhouse to consolidate all his accounts with one broker.

Another blog worth an investment of your time is Million Dollar Journey, which has a chart comparing eight Canadian discount brokers (www.milliondollarjourney.com).

Besides fees and commissions, he looks at such factors as: What is the margin rate? Can you get real-time quotes free? What is the minimum required to open an account? Is there a maintenance cost? How much interest is paid on cash? Can you use a dividend reinvestment plan? What is the foreign exchange fee or spread charged?

This blog also publishes reviews of individual brokers and critical comments from readers.

"It took a total of 5.5 weeks for my RRSP to get transferred from Tradefreedom to Questrade," says one investor. "I saw that my RRSP positions were incorrect. I’m pretty frustrated with the overall experience."

In case you think it’s all one-sided, you can find responses from Lynn Suderman, communications manager for Questrade, to some of this negative feedback.

Next week, we’ll look at how to put together a portfolio of exchange-traded funds that needs little oversight or supervision.

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