Saturday, November 1, 2008

American Express will cut 7,000 jobs

(AP) - In a stark acknowledgment of the tough times ahead in the credit card industry, American Express Co. said Thursday that it plans to cut 7,000 jobs, or about 10% of its worldwide work force, in an effort to slash costs by $1.8 billion in 2009.

The Manhattan-based credit card issuer said it is also suspending management level salary increases next year and instituting a hiring freeze.

The job cuts will be across various business units, but will primarily focus on management positions, the company said.

Additionally, American Express said it plans to scale back investments in technology and marketing and business development, and streamline costs associated with some rewards programs. The company also expects to cut expenses for consulting and other professional services, travel and entertainment and general overhead.

As a result, American Express plans to take a restructuring charge of between $240 million and $290 million in the fourth quarter.

The company has been gearing up for a big restructuring for some time, first announcing in July that it planned to reduce overall costs and staffing levels, and take a related charge during the second half of the year.

"We've been engaged for the past few months in an intensive, companywide review of priorities and staffing levels," said Kenneth Chenault, chairman and chief executive, in a statement. "The re-engineering program we announced today will help us to manage through one of the most challenging economic environments we've seen in many decades. It will also put us in position to ramp up investment spending as economic conditions improve so that we can take advantage of the substantial opportunities that will be available to us over the medium to long term."

Last week, American Express reported a better-than-expected 24% decline in third-quarter profit. But the report echoed recent results from J.P. Morgan Chase & Co., Citigroup Inc. and Capital One Financial Corp. showing that the credit card environment is worsening as cardholders have trouble paying off debt and pull back their spending.

Even a company like American Express, which prides itself on catering to a more well-heeled clientele, is not immune.

The company's customers tend to be more affluent than those of other card companies, but they are more heavily concentrated in California and Florida, where the slumping housing market is taking a toll. American Express also has a higher percentage of small-business customers, and small businesses tend to miss payments more than individuals, executives have said.

"Cardmember spending is likely to remain soft," Mr. Chenault said in a statement last week. "Loan growth will be restrained, in part because of the steps we are taking to reduce credit risks, and credit indicators are likely to reflect the continued downturn in the economy and throughout the housing sector."

American Express has been able to finance its operations amid the tight credit markets, but the efforts have been tougher and more costly.

Shares rose $1.23, or 4.9%, to $26.44 in morning trading. Shares have traded between $20.50 and $61.55 in the past 12 months.

©Copyright 2008 Associated Press.

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Bank of America Sues Bear Stearns Execs

Zach Lowe
The American Lawyer

Ralph Cioffi and Matt Tannin have become household names in the Am Law 100 world since June, after the feds indicted them for fraud for allegedly lying to investors about the state of two Bear Stearns hedge funds that collapsed in June 2007.

The case has now spilled into civil court, with Bank of America filing suit Wednesday against Cioffi, Tannin and a third Bear Stearns exec for hiding the funds' poor health in order to the draw the bank into a complicated $4 billion transaction in which mortgage-backed securities controlled by the funds were pooled to support the sale of other securities.

The bank has retained Robbins, Russell, Englert, Orseck, Untereiner & Sauber for the suit, which was filed Wednesday in federal court in Manhattan. Name partner Lawrence Robbins signed the complaint.

The complaint repeats many of the allegations against Cioffi already outlined by prosecutors and the SEC, including this gem: Cioffi allegedly told a Bear Stearns economist in March 2007, "Don't talk about [the funds' February results] to anyone or I'll shoot you."

Such messages, the complaint says, continued internally throughout the spring, including in a May 26 e-mail in which Tannin warned that the funds were "in danger of a wipe out." It was then that Bank of America was agreeing to take on about $2.9 billion collateral to finance the $4 billion securitization, the complaint says. That collateral became worthless when the funds collapsed in June.

One note of interest: the third ex-Bear Stearns executive named in the complaint, Raymond McGarrigal, now works at JPMorgan Chase.

This article first appeared on The Am Law Daily blog on

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IRS wrongly paid out $1 billion in 2007 refunds

WASHINGTON - The government sent out more than $1 billion in fraudulent refunds last year and offered this explanation Thursday for the bad checks in the mail: The Internal Revenue Service has too few resources to pursue every tax fraud case.

IRS investigators never even looked at an estimated $742 million in fraudulent refunds, according to a report by the Treasury Department office that monitors the agency. When they did identify an additional $264 million in bad refunds, it was too late to stop them from being issued.

The report noted that the IRS must divide its limited resources among numerous areas of compliance. "However, this is a significant revenue loss to the federal government and that must be addressed," said J. Russell George, the Treasury's inspector general for tax administration.

The number of improper refunds filed appears to be growing rapidly, the report said. "The problem is becoming unmanageable, and the IRS cannot afford to continue handling it in the same manner as in the past," according to the report. It urged the tax agency to make the refund screening program — known as the Questionable Refund Program — a priority.

The IRS has estimated that the tax gap — the difference between taxes owed and taxes actually paid — at about $290 billion a year. Of that, about 57 percent comes from individuals understating incomes or overstating deductions and exemptions.

IRS spokesman Terry Lemons said the agency has made significant improvements over the past two years. "We stop the vast majority of fraudulent refunds and we prosecute people who try to cheat the system," Lemons said.

George's report recommended the IRS divert resources to go after such fraud cases. But Lemons said that could hurt other operations and mean fewer dollars from enforcement activities.

Lemons said the agency issued more than $470 billion in refunds in 2006 and 2007.

The report said the IRS fraud detection centers stopped more than $1.2 billion in fraudulent refunds in 2007, compared with $412 million in 2005, the last year the detection system fully functioned.

Because the system picks up only those refunds with higher dollar values, about 500,000 potentially fraudulent refunds did not enter the centers' screening process. Had those refunds been included, the centers would have identified an additional $742 million in fraud, the report estimated.

In 2006, because of a technical problem in the fraud detection system, the IRS succeeded in identifying and stopping only $189 million in fraudulent refunds while paying out an estimated $894 million, the report said.

The Treasury's inspector general, in a separate report Thursday, lauded the IRS for what it said was a "generally successful" 2008 filing season during which returns and refunds were processed in a timely fashion.

This report said the IRS did a good job in overcoming several obstacles, including changes involving the alternative minimum tax. The agency was also responsible for sending out checks to more than 130 million people as part of the economic aid plan signed into law in February.

Copyright 2008 The Associated Press.

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Consumer cut in spending the most since 1980


WASHINGTON (AP) — Scared and out of money, Americans stopped buying everything from cars to corn flakes in the July-September quarter, ratcheting back spending by the largest amount in 28 years and jolting the national economy into what could be the most painful recession in decades.

With retailers bracing for a grim holiday buying season, the economy isn't just slowing; it's actually shrinking, the government confirmed Thursday. It reported that the nation's gross domestic product declined at an annual rate of 0.3 percent in the year's third quarter and consumers' disposable income took its biggest drop on record.

In simpler words, "The train went off the tracks," said Brian Bethune, economist at IHS global Insight.

Wall Street took comfort in the fact that it wasn't even worse. The Dow Jones industrials rose 190 points.

But economists say tougher times are still ahead. Believing consumers are cutting back even more right now, they predict a much larger economic decline — anywhere from a 1 to 2 percent rate — during the current October-December period. That would meet a classic definition of a recession — two straight quarters of shrinking GDP.

Not that there's any real doubt now.

Clobbered by pink slips, shrinking nest eggs and falling home values — consumers are holding ever tighter to their wallets. The new report said Americans' disposable income fell at an annual rate of 8.7 percent in the quarter, the largest in records dating back to 1947.

The dismal news came just days before the nation picks the next president. Whether Democrat Barack Obama or Republican John McCain wins the White House, he will inherit a deeply troubled economy and a record-high budget deficit that could cramp his spending plans.

Each side said the new figures supported its political case.

"The decline in GDP didn't happen by accident — it is a direct result of the Bush administration's trickle down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years," Obama said. He pledged to provide tax relief to middle class families and help people facing foreclosure.

Pointing to the economy's sad state, Doug Holtz-Eakin, senior policy adviser for the McCain campaign, shot back that "Barack Obama would accelerate this dangerous course." McCain said his tax cuts, free-trade policies and help to struggling homeowners would help turn things around.

More than in recent recessions, consumers — the lifeblood of the economy — are bearing the brunt of the country's housing, banking and other ailments. The third-quarter decline in their spending was the first in 17 years, and the 3.1 percent annualized cutback was staggering — the most since the spring of 1980 when the country was in the grip of what some call the worst downturn since the Great Depression.

Walloped by such a huge pullback, the economy toppled into negative territory.

The latest reading on GDP, which measures the value of all goods produced within the United States, showed a rapid turn from the 2.8 percent growth rate logged in the second quarter. The new figure was the worst since the 1.4 percent rate of decline in the third quarter of 2001, when the nation was suffering through its most recent recession.

Democrats on Capitol Hill are pushing for another economic stimulus package and are weighing whether to hold a lame duck session before the new president takes office.

Under attack from Democrats and Republicans alike, the White House defended giving billions of bailout dollars to banks that now are rewarding shareholders and executives — or even buying other banks — rather than making loans to consumers and businesses.

Ed Lazear, chairman of the Council of Economic Advisers, said the government is keeping close tabs on banks' use of the money, but he also said normal activities such as paying performance-related salaries or distributing dividends are allowed under the law Congress passed.

White House press secretary Dana Perino said that "not only rich people get dividend payments," which can form a significant portion of income for retirees and mutual funds.

A collapse of the housing market and locked-up lending have produced the worst financial crisis to hit the country in more than 70 years.

To cushion the fallout, the Fed slashed interest rates on Wednesday by half a percentage point to 1 percent, a level seen only once before in the last half century.

Fed Chairman Ben Bernanke has warned that the country's economic weakness could last for some time — even if the government's unprecedented $700 billion financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.

"As of now, most forecasts indicate that we will experience a serious recession, perhaps comparable to the recession of the early 1980s, but nothing like the Great Depression," said Simon Johnson, former chief economist to the International Monetary Fund and senior fellow at the Peterson Institute for International Economics. During the 1980-1982 recession, unemployment topped 10 percent.

Other analysts, including Mark Zandi, chief economist at Moody's, predicts the downturn will be much more severe than the 2001 and 1990-1991 recessions but not as bad — in terms of unemployment or lost growth — as the 1980s one.

The unemployment rate, now at 6.1 percent, could hit 8 percent or higher next year.

The Labor Department said Thursday that new claims for unemployment benefits last week held steady at 479,000, an elevated figure that continued to point to troubles in the jobs market.

In the third quarter, consumers cut back on purchases of cars, furniture, household appliances, clothes and almost everything else.

Businesses cut back, too, trimming spending on equipment and software at a 5.5 percent pace, the most since the first quarter of 2002. And home builders slashed spending at a 19.1 percent pace, marking the 11th straight quarterly cutback.

Slower growth for U.S. exports — reflecting less demand from overseas buyers who are coping with their own economic problems — also factored into the weak GDP report. Exports grew at a 5.9 percent pace in the third quarter, less than half the second quarter's 12.3 percent rate.

Associated Press Writer Jennifer Loven contributed to this report.

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Josef Fritzl kept sick mother locked in attic, leaked papers reveal

Angela Balakrishnan

Josef and Elisabeth Fritzl. Photograph: EPA

Josef Fritzl, the Austrian accused of raping and imprisoning his daughter, kept his ailing mother locked in an attic room with bricked-up windows until her death, according to leaked court reports.

The Austrian newspapers Kronen Zeitung and Österreich have published accounts of Fritzl's interviews with a forensic psychiatrist in which he says he incarcerated his mother - who he blames for his actions - in the attic of her own house shortly before he locked up his daughter.

The retired engineer and property developer said it was revenge for the abuse he claims she inflicted upon him.

Fritzl's mother died in 1980. By then, Fritzl had begun building the concrete dungeon that would imprison his daughter, Elisabeth.

Fritzl is awaiting trial for raping and incarcerating Elisabeth for 24 years in a purpose-built prison beneath his home in the town of Amstetten. He faces charges of sexual abuse, incest, coercion and manslaughter.

He fathered seven children with Elisabeth, now 42, during her years of captivity. One of the children, a baby boy called Michael, died shortly after birth and it is alleged Fritzl disposed of the body in an incinerator.

The confessions were made to Dr Adelheid Kastner, an Austrian prison psychiatrist who is assessing the 73-year-old's mental state during six in-depth sessions before Fritzl's trial, which is expected to start in January.

This week, Austrian newspapers reported Fritzl describing how his abusive relationship with his mother fed his life as a rapist.

"She never showed me any love, she beat me and kicked me until I was on the floor and bleeding," he said. "I felt so weak and humiliated. I never got a kiss from her or even a hug although I tried very hard to please her. The only thing she did with me was go to church.

"She beat me and kicked me until I was lying on the floor bleeding. I had a horrible fear from her. She kept insulting me and told me I was a Satan, a criminal, a no-good."

Reports revealed that Fritzl's mother raised him alone after a bitter divorce. Fritzl claims he was isolated from other children and was an "alibi child"– his mother only had him to prove to her husband she was not sterile.

According to Fritzl, he moved into the Amstetten house in 1959 soon after he married his wife, Rosmarie. His mother moved into the house with them and Kastner was told how their roles gradually reversed with Fritzl's mother coming to fear her son.

It is unknown how long his mother was kept in a room without daylight, but Austrian newspapers speculate it could have been for up to 20 years.

In the leaked confidential report, the psychiatrist declared Fritzl as sane and fit for trial despite suffering from a "severe combined personality disorder" and "a sexual disorder".

In the first of the leaked accounts in Austrian newspapers, Fritzl said: "I have realised that I had a mean streak. For someone who was born to be a rapist, I have managed to contain myself for a relatively long period."

He allegedly hatched his plan to incarcerate his daughter, Elisabeth, while he was in prison for rape.

In 1967 he was sentenced to 18 months in prison for brutally raping a 24-year-old woman at knifepoint in her home.

Kastner writes that Fritzl devised the "ideal solution" to his deranged fantasies after he was released from prison. He decided to lock up his daughter in the cellar so that he could "live out" his "evil side" while leading a seemingly normal life in the flat upstairs.

Kastner came to the conclusion when dissecting the personality of Fritzl that the electrician managed to distance himself from what he was doing by never looking his victim in the face when he raped her.

"He was not only incredibly able to lead a double life but also managed to maintain a triple life without any problems," she wrote, indicating that Fritzl played down the gravity of his crimes in his mind.

"Mr Fritzl resembles a volcano: under the surface that appears almost banal there is an evil streak. He is torn apart by his desires that he cannot master."

Three children aged 12 to 15 whom Fritzl fathered with Elisabeth lived in the large upstairs apartment with him and his wife, Rosemarie, 69. Their other three siblings, aged five to 19, were kept in the cellar with their mother, never seeing the light of day until they were freed by police on April 26 this year.

Fritzl believed himself to be a good father to his incestuous family, he told the psychiatrist, and took them games and celebrated birthdays and Christmas with them.

It is believed Fritzl will try to use his claims of his own alleged childhood abuse to explain his actions towards his daughter.

Kastner concluded in her report that Fritzl was cold-blooded and calculating.

"His narcissism combines with the lack of empathy and contributes to the exploitative way of turning others into instruments of satisfying his own needs. There is also a noticeable ability or tendency to 'modify' reality according to his own wishes," she wrote.

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