Companies Shed Initial Resistance to iPhone 3

Companies that don't support the iPhone say they are inhibited for several reasons. Antenna Software specializes in products that help companies manage mobile devices. In December, the company released results of a survey of its customers in which 49% of respondents said the biggest barrier is the fact that AT&T (T) is the only U.S. service provider. Among respondents, 40% said they are concerned about the increased costs of supporting another mobile device. About one-third of respondents wanted better tools to manage the device, like shutting off such features as the camera or the ability to do a remote wipe of data if the phone were lost. While Apple has made it easy to download apps, it's a little bit trickier for IT departments that want to update hundreds or thousands of devices at a time—that was a concern for about 22% of respondents. "One of the big challenges for Apple is that they don't have a good story around mobile device management," says Stephen Drake, program vice-president at IDC. Forrester's Schadler says that Kraft has encountered problems with calendar synchronization.

Still, Avaya is mostly pleased with the devices. "The iPhones are a bit expensive [to operate]," says Avaya's Loo. "The majority of the expense is in the data plan, not in the voice side of it; but we're pretty satisfied with what we have right now." Apple has said it will address some outstanding issues with iPhone 3.0 this summer, but it declined to elaborate for this story.

Yet those issues aren't stopping some companies, such as IT consulting firm Dimension Data from supporting it. When iPhone 2.0 was released, the Dimension Data Americas region, with 1,000 employees, was quick to support it. Darren Augi, vice-president for IT, was the first iPhone user within the corporation, followed closely by CEO Jere Brown and CTO Mark Slaga. About 100 employees at Dimension Data Americas now use iPhones.

Augi says he'd made a hobby out of testing new mobile devices. "I had been looking for the perfect device for a long time," he says, but would often discard them in favor of the next new thing. That changed last year when Apple released iPhone 2.0. "Nothing has lured me away from it yet," he says. "It's the best device I've ever worked with—I don't see leaving it."

Companies Shed Initial Resistance to iPhone 2

In 2008, about 173.6 million smartphones were sold worldwide, according to market research firm iSuppli. Nokia (NOK) sold 60.5 million, RIM sold 22.6 million, and Samsung and Apple tied for third place with 13.7 million each. In U.S. corporations today, though, the top three operating systems are BlackBerry, Windows Mobile, and the iPhone OS.

Edging into the C-Suite

Corporate hesitation also diminishes when the CEO or other high-level executives start bringing iPhones to work. Executives say they like the iPhone's Web browsing and multimedia capabilities as well as its ease of use. "IT won't tell the CEO that they won't support it," says Michael Osterman, principal at Osterman Research. This is reminiscent of the way BlackBerry made its way into corporations. Gabe Zichermann says that about 30% of the users of BeamME, his company's iPhone app for exchanging contact info, were C-level executives.

At business analytics software company SAS, co-founder John Sall was among the first to ask the IT department to support his iPhone when it was first released in 2007. "Considering his relationship and his role in the company, we managed to meet that need," says Bob Bonham, senior director of IT at SAS. When the second version of the iPhone software was released in 2008, it included ActiveSync, software that made it easy for the IT department to connect the devices to Microsoft Exchange. At that stage, SAS made iPhones available to employees if there's a business need for them. "Our predominant device is still the BlackBerry," Bonham says. He adds that SAS will eventually let employees choose whether they want to use a BlackBerry, Windows Mobile device, or iPhone. Today, employees who bring their own iPhones to work can have them hooked up to corporate e-mail. Currently, SAS supports about 1,000 BlackBerry devices, 100 to 200 iPhones, and 50 to 100 Windows Mobile devices. The company's total workforce is more than 11,000.

The tech industry isn't alone in early adoption of the iPhone. Others include transportation, entertainment, retail, and life sciences, says Forrester's Schadler. They've become especially popular with doctors. For years, Zach Hettinger, a physician in Rochester, N.Y., carried both a cell phone and a Palm (PALM) device that contained a pharmacy database and other work-related applications, such as vaccine schedules and pregnancy calculators to estimate due dates. "With the iPhone, all those references have become accessible, so that you only need one device," Hettinger says. Today he carries only an iPhone, and he says that his father, also a physician, recently made the switch as well.

Lack of Support

The iPhone isn't for every company, and it hasn't been widely adopted in certain industries, such as banking and insurance, says Forrester's Schadler. Plenty of companies haven't yet decided to let employees use iPhones at work. In July 2007, American Airlines (AMR) Chief Information Officer Monte Ford told BusinessWeek that his company would not support the iPhone due to security concerns. Today, iPhones are still verboten at American Airlines. BusinessWeek parent The McGraw-Hill Companies (MHP) also does not support the iPhone.

Companies Shed Initial Resistance to iPhone 1

By Rachael King

Michael Loo didn't want to become an iPhone user at first. "I really fought it quite hard," he says. As vice-president for global IT at telecom equipment vendor Avaya, Loo was concerned that the phone might not keep corporate data secure. Another beef: the iPhone's lack of a keyboard. For a year, his company declined to provide support for employees who wanted to use the device at work. Loo held out even longer.

But Loo and his employer have had a change of heart. In July 2008, when Apple (AAPL) officially released a version of iPhone software with beefed-up security and better support for corporate e-mail, Avaya gave employees the green light. Less than a year later, Avaya counts about 998 iPhone users out of about 9,800 who carry mobile devices. Loo caved a couple of weeks ago.

Like Avaya, many U.S. corporations are embracing the iPhone after initial resistance. Research In Motion's (RIMM) BlackBerry is still the leading smartphone for U.S. corporations, but the iPhone is gaining ground. In a survey of 127 large and midsize companies conducted by consulting firm Osterman Research on behalf of software provider Neverfail, 20% said they supported the iPhone in 2008, compared with 82% that supported BlackBerry devices and 66% that supported devices that run Microsoft's (MSFT) Windows Mobile. Yet, when asked which devices they planned to support in 2009, 44% of those companies said they'd support the iPhone. Support for BlackBerry dropped to 75% and for Windows Mobile to 64%.

Gaining Ground

Apple makes it easier for companies to reverse their iPhone opposition in part through upgrades to the software that make the device more business friendly. A version due in June, iPhone 3.0, will add security and management features expected to make it more attractive to large companies. "It's too early for iPhone to be a serious competitor to BlackBerry in the enterprise, but a year from now it will be," says Ted Schadler, vice-president and principal analyst at Forrester Research (FORR) who on Apr. 14 published a report on iPhone use by enterprises. Schadler points to Oracle (ORCL) and Kraft Foods (KRFT) as two examples of companies that have made the leap. In January 2009, Oracle counted about 4,000 employees with iPhones in its global workforce of about 86,000. That same month, about 2,000 Kraft employees—almost half the company's mobile users—carried iPhones. Schadler says that by the end of 2009, Kraft expects to have 4,000 to 5,000 workers using the device. That represents about 4% to 5% of its total workforce.

Much of the impetus for widening iPhone adoption in business comes from employees themselves. People are purchasing their own smartphones and using them at work to access corporate data or networks. Almost 40% of the smart phone purchases in the U.S. in 2008 were made by individuals rather than corporations, according to IDC. Also in 2008, about 7.3 million smartphones in the U.S. were brought into the workplace. That's expected to grow 43.5%, to 21.5 million, in 2012, IDC says. Economic malaise is accelerating the trend as businesses that once frowned on employee-owned devices are revising the policy as a way to ask employees to share in the cost of equipment. "Companies are looking to tighten their belts and still keep people as productive as possible," says Sean Ryan, research analyst of mobile enterprise at IDC.

Apple + Twitter = A Better Combination Than You Might Think

Posted by: Arik Hesseldahl on May 05

I’ve been waiting on this rumor for awhile, not because I have any knowledge of talks between them, but because it simply felt inevitable. As Valleywag tells it, Apple is in talks to acquire Twitter, talks which writer Owen Thomas describes as “serious.” Such a deal would have Apple paying $700 million in cash for the Web service.

Twitter is the major Web property of the moment, and so rumors about possible acquisitions aren’t a new phenomenon. Apple’s enormous pile of cash makes it a possible acquirer, meaning a rumor about such a deal was almost certain to emerge at one point or another.

I don’t know if this rumor is true, but I’m not prepared to dismiss it out of hand because it makes a great deal of sense.

Where’s the synergy, you ask?

Apple isn’t a particularly strong player on the Web — MobileMe is about the extent of it — and so Twitter would bring, among other things, a strong Web development team with a proven record for building successful products. Twitter founder Evan Williams has already sold one successful Web startup — Blogger.com — to Google.

But the real story is the iPhone. I don’t know if there are any statistics to back this up, but anecdotally I’ve noticed a lot of iPhone users tend also to be Twitter users. The Twitter client Tweetie is as of this morning ranked #32 on the list of top 100 paid iPhone applications. But the connections between the iPhone and Twitter go deeper than that.

Search the app store for the word “Twitter” and you find that not only are there a lot of Twitter clients, ranging from Tweetie to Twitterific to ZipTweet but you also notice that Twitter support is built in to an awful lot of iPhone Apps. USA Today’s iPhone app has Twitter support, for example. “Read It Later Free” does too. Several streaming radio apps let you post a link to what you’re listening to directly to your Twitter feed. “Mobile Fotos,” a photo-sharing app, supports Twitter and integrates nicely with all the major Twitter clients. I didn’t count them all, but there are lots and lot of iPhone applications that mention Twitter in their descriptions, and while some of those mentions are simply “follow us on twitter,” a great deal of them include features that integrate with Twitter in some creative manner. (If anyone knows the number, please say so in the comments.)

Apple might be seeing a trend among its applications developers that isn’t clear from the outside: If iPhone users love Twitter, then apps developers are building Twitter support into their applications. That gives you two arguments in support of an acquisition. Users love it, developers love it. Almost reason enough to bring the entire Twitter ecosystem under Apple’s control, and make it an official part of the iPhone ecosystem.

Whats the third? It’s cheap. Apple has $4.5 billion in cash plus another $20.5 billion in short term investments plus another $4.6 billion in net receivables, which all adds up to a cash hoard that’s just shy of the $30 billion mark. Paying $700 million for Twitter now would be a difficult offer to turn down for the Twitter guys, and it would give Apple control of the what’s arguably the most important Web company going right now, and thus keep it out of the hands of the likes of Google, Microsoft, and Facebook.

So while at first this seems a weird rumor — and I should be clear that I actually don’t think it is true — I’m simply not willing to completely dismiss it out of hand, because it makes a surprising amount of sense. Would Twitter be a good fit inside of Apple? That’s another question entirely.

Here’s a better scenario: Maybe Apple should invest in Twitter.

Will Financial Stocks Clean Up? 1

By Ben Steverman

A couple of weeks ago, it seemingly couldn't get any worse for financial stocks, particularly banks. Equity prices hit decade-plus lows because many investors genuinely worried certain bank stocks were worthless—either because the banks were doomed or because the government would take them over.

But sentiment on Wall Street can turn on a dime these days. Stocks, particularly financial stocks, surged on Mar. 23, and the reason most commonly cited was the release of details of the U.S. Treasury's plan to set up a public-private partnership to buy up toxic assets—and remove them from banks' balance sheets. The KBW Bank index (KBX) jumped 18.6% in one day.

But investors who are buying more financial stocks—sometimes for the first time in years—say they're not jumping into the risky sector based on one government plan.

One Piece of the Puzzle

The Treasury's effort is just one part of the solving the subprime puzzle, says Michael Sheldon, chief market strategist at RDM Financial Group. "The plumbing of the financial system is slowly being put back together, piece by piece," he says.

The first signs of springtime for banks appeared a couple weeks ago. On Mar. 10 the head of one of America's most troubled big banks, Citigroup (C) Chief Executive Vikram Pandit, told his employees he was "most encouraged with the strength of our business so far in 2009." He said the bank made a profit in the first two months of 2009.

Whether investors adopted Pandit's rosy outlook or not, his comments reminded investors of one thing that has almost certainly true: If it weren't for all the pesky losses from what the Treasury calls "legacy" assets—the soured derivatives haunting banks' balance sheets—this would be a good time for the basic banking business.

The Federal Reserve has cut short-term interest rates to nearly zero, giving banks a big advantage: They can borrow at low rates and then lend at higher rates, giving them some of their widest profit margins in years.

A Cheery $1 Trillion

A week after the Pandit memo, the Fed said it would devote more than $1 trillion to buy up debt, an effort to perk up credit markets. Financial stocks rose again.

Then, on Mar. 23, the market celebrated new Washington policy again, a huge contrast to its disappointed reaction to Treasury Secretary Timothy Geithner's first attempt to announce a plan to deal with toxic assets on Feb. 18. Back then, Geithner was criticized for being vague and lacking details.

But while the Street seemed positively ebullient on Mar. 23, there are still plenty of doubters. To say there are still unanswered questions is an understatement. And many observers criticized this plan, too, saying it was un-workable or too generous to banks.

But for the first time, says Dan Genter, president of RNC Genter, "everyone is saying, 'Fine, we're at least moving in the right direction.'"

There's no simple way to fix the financial crisis, Genter says. But the basic details of Geithner's new plan remove a major fear: "The major concern," Genter says, "is that the Administration was going to make it worse."

Google Keeps Tweaking Search Results, Leaving Little Room for Rivals

by: Rob Hof on March 24

Google just announced two new refinements to its search engine today, continuing to leave little room for competitors to get a foothold. The tweaks, announced in a Google blog post this morning, generally aim to produce better results for search queries with lots of keywords in them:

* There’s now a “searches related to:” list at the bottom of search results pages that provide other keyword strings related in concept to your search, especially for longer strings of words.

* Longer keyword searches of three words or more will bring up a bit of a snippet of text from relevant pages, giving people a better idea of whether that page is worth clicking on.

The first and most important change is based on the Orion search technology that Google acquired in late 2006. This so-called semantic search, which helps people find related concepts, based on the meaning of the words and not just matching the words themselves, is something many people are working on, with limited success so far. One recent entrant is WolframAlpha from noted Mathematica inventor Stephen Wolfram. Microsoft also bought the semantic search startup Powerset last year. For its part, Yahoo has been offering Search BOSS to offer other Web developers ways to use its technology to create custom search engines.

But Google clearly isn’t sitting still, so it will be as hard as ever for rivals such as Microsoft and Yahoo to catch up.

Bailout: Getting Banks to Bite 3

Fraud Is Another Risk

Bair emphasized that her agency's risk would be low. First, the FDIC's loans would be separate from its flagship deposit-insurance program, and the fees the agency will charge for its loan guarantees could even bolster its finances. Meantime, she noted that any given pool of assets would have to lose at least 15%—the amount put up by the Treasury and private investors—before the FDIC would be at risk of having to make good on its guarantee.

"I actually think the credit risks are pretty good for us," she said, saying several times that she expects the arrangement "to make money" for the FDIC.

Kyle argues that the relatively modest private-sector participation carries another risk: fraud. A large increase in the purchase price for a pool of assets will only cost the investors a small amount—an additional $100 million bid for a pool could cost the investors just $7 million, for example. And, because investors control the bidding, they could collude with the bank selling the assets to inflate prices and be reimbursed by the bank reaping the gains, Kyle said.

Pimco's Bill Gross Hails Plan

Treasury officials are aware of the risk, and are working with the federal bailout's Special Inspector General's office and consultants to prevent fraud, a person familiar with the matter said.

Institutional investors, however, were generally supportive of the plan. Some of them hailed it as the kind of clear, bold step that could mark a turning point in the financial crisis. Bill Gross, the high-profile bond fund manager at Pacific Investment Management Co., or Pimco, told Reuters that "this is perhaps the first win-win-win policy to be put on the table and it should be welcomed enthusiastically."

But a serious hitch could be the white-hot anger that taxpayers and their congressional representatives feel over earlier bailouts, warned Stephen Auth, chief investment officer for global equity at Federated Investors (FII). Last week, outrage boiled over regarding bonuses paid out by American International Group (AIG), the huge insurance company that has received billions of taxpayer dollars to avoid collapse. That was capped by the House of Representatives passing a 90% tax on many bonuses paid by big financial firms receiving federal aid. The possibility of becoming a similar target could spook companies that otherwise would be willing to invest alongside the government, or sell toxic assets under the new program.

A Lot Riding on the Senate

Although Treasury and FDIC officials have said the range of executive-comp rules applied to companies receiving bailout funds wouldn't be applied to participants in the new program, Auth said investors might not trust those assurances. Much depends on whether the Senate adopts the House bonus tax, or tones it down significantly, he said.

"If they put that thing through the way it's drafted now, you can forget Geithner's plan," Auth said.

Francis is a writer in BusinessWeek's Washington bureau. Sasseen is Washington bureau chief for BusinessWeek.

Bailout: Getting Banks to Bite 2

Pressure from Bank Regulators

Then again, they may not have much choice. The federal government owns significant stakes in most of the big banks, giving Administration officials and key members of Congress a toehold to pressure the banks. And bank regulators hold considerable sway over the assets that banks hold, and sell, even in ordinary times.

Indeed, asked if the FDIC and banking regulators will pressure banks to sell assets under the program, Bair was vague, but suggested they would. "There will be a consultative process with the [banking] supervisors," Bair said, "and yes, this program will be among the tools available" to improve bank finances.

Administration officials said banks may actually be willing to take a hit by selling the assets at a lower price if it lets them clean up their balance sheets and get access to the now-wary capital markets again. "This will make it easier for them to raise private capital," Geithner said.

Plan Praised by Industry Group

That's a point echoed by Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents large financial institutions. The group lauded Monday's proposal. Any losses likely wouldn't be large, Talbott predicted. "This program allows them to strengthen their balance sheet and increase their presence in the lending arena."

Bair's comments on the plan suggested that the Administration fundamentally agrees with banks in the debate over how much the assets are worth. She referred at times to a "liquidity discount" that she said was present in the depressed market prices of the troubled assets. Bair also described "prices that are much, much lower than credit losses would suggest." That has prompted disbelief from some investors, who argue the market prices accurately reflect the assets' values, and say many banks are in fact already insolvent as a result. "It's not a liquidity problem—it's always been a solvency problem," said Bob Eisenbeis, chief monetary economist for Cumberland Advisors.

Critics raised other concerns as well, primarily noting that the government may well end up overpaying for the assets. Private-sector investors will set the selling prices by bidding on pools of assets; that will determine the amount the Treasury invests, and, ultimately, help determine the amount of leverage backed by the Fed or the FDIC.

Transfer of Wealth to Stockholders

But that government-backed lending will lower the risk that the investors face, which in turn will help raise the price that investors are willing to pay for a given set of assets. "It represents a huge transfer of taxpayer wealth from the taxpayers to the shareholders of financial stocks," said Albert "Pete" Kyle, a University of Maryland finance professor.

Others question the small part of the total investment the private sector will provide under the program—as little as 6% for some asset pools. But Geithner stressed that investors stand to lose everything before the government takes a hit.

Investors' "entire capital will be at risk, that's the important thing," he said. "If there's a return over time, which we expect there will be, taxpayers will share in that return."

At the evening conference, Geithner also stressed that the potential risks are far better than the other two alternatives: that either the government do nothing and let the dangerous process of deleveraging continue uninterrupted, or that the government step in on its own. That, he argues, would increasing the likelihood of overpaying for the bad assets.

"All financial crises are ultimately a debate about how much risk the government should take on," he said. To have the government shoulder the risk of cleaning up the banks on its own, he added, "is not healthy for the economy."

Bailout: Getting Banks to Bite 1

By Theo Francis and Jane Sasseen

As the Obama Administration's plans to lift toxic assets off bank balance sheets took form, speculation swirled over whether private-sector investors could be enticed to take part. Now another question is looming: Will the banks participate?

On Mar. 23, Treasury Secretary Timothy Geithner unveiled the latest effort by the government to stabilize banks and unlock frozen credit markets. The long-awaited plan would use $75 billion to $100 billion of federal bailout funds—together with an equal amount of private-sector money and federal loans and guarantees that could bring the total investment to $1 trillion over time—to buy questionable, mostly mortgage-backed assets from banks.

The market soared in response, with the Dow Jones industrial average rising nearly 500 points, or 6.8%. The financial industry hailed the plan as a solid fix that could revive a moribund credit market. But while that reaction relieved some of the immediate pressures on Geithner and the Administration, it was hardly unanimous. Critics called it a series of opaque subsidies that, at best, would prop up the banks and their shareholders without doing much to revive lending. And the embattled Treasury secretary clearly knows he faces huge challenges ahead. "One day's [market] reaction does not make a plan," he said, speaking later that evening at a conference on the future of finance sponsored by The Wall Street Journal.

Funds Leveraged Sixfold

In many ways, the plan is straightforward: Private-sector investors will bid to buy a stake in pools of assets—either residential and commercial mortgage loans, or securities tied to a variety of other troubled debt—and their investments will be matched dollar for dollar by the Treasury. Those funds will then be leveraged as much as sixfold through loans backed by either the Federal Deposit Insurance Corp. or the Federal Reserve.

But the same dynamic that has stymied the normal market for these securities could discourage banks from participating, investors and financial experts say.

At the root of it, banks and investors disagree about what the assets are worth. Investors point to the dramatic collapse of the housing market and rising foreclosure rates, among other factors, that mean many of the assets are unlikely to perform as advertised, particularly as a worsening economy puts further pressure on the underlying borrowers.

Banks on Shaky Ground

Banks note that 90% or more of homeowners are current on their mortgages. They argue that most of the assets will ultimately perform—and thus are worth far more than the discounted prices investors are willing to pay. Moreover, many banks are already on shaky financial ground, and recognizing the assets at a lower value could leave them worse off, and potentially insolvent.

But while the program announced Mar. 23 contains sweeteners to entice investors to the table—chief among them government-backed financing—banks may remain reluctant to sell unless the ultimate price matches or exceeds the asset value the banks have recorded on their books. And Sheila Bair, chairman of the FDIC, made clear later in the day that she expects banks to take a hit: "They will have to take losses to sell into this facility," she said.

In that case, warned one bank analyst who works for an investment management company, "there's no incentive for banks to participate."

Obama tries to halt talk of bank nationalization

By BEN FELLER

WASHINGTON

The White House on Friday insisted it's not trying to take over two ailing financial institutions, even as stocks tumbled again.

On Wall Street, talk of nationalization of Citigroup Inc., and Bank of America Corp., prompted investors to continue to balk, worried that the government would have to take control and wipe out shareholders in the process. Citigroup fell 20 percent, while Bank of America fell 12 percent in afternoon trading but also came off their lowest levels.

"This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," White House press secretary Robert Gibbs said when asked about nationalizing the banks.

"That's been our belief for quite some time, and we continue to have that," Gibbs said.

Investors have shown decreasing confidence that U.S. banks can right themselves. Citigroup and Bank of America have already received significant help from taxpayers as the government has rushed in to try to save the financial sector, which has been choked by bad assets and seen the flow of credit shrink.

The speculation about the two banks' future continued to take a direct toll on the market.

Gibbs was pressed for more details on his answer -- specifically whether Obama would not nationalize banks. He said it was hard for him to be any clearer.

When a reporter suggested Gibbs could do that by saying point bank that Obama would never nationalize banks, Gibbs would not make that statement, but emphasized: "I think I was very clear about the system that this country has and will continue to have."

Congress Set to Curb Exec Pay at Troubled Companies

By Nanette Byrnes

Congress is about to do in one vote what years of shareholder agitation has failed to accomplish: sharply curb top executives' pay at poorly performing companies. The final version of the $787 billion stimulus bill heading toward a vote in the House and Senate steered clear of the hard $400,000 cap the original Senate version of the bill had embraced, but the new terms are pretty stiff nonetheless.

President Barack Obama's Feb. 4 plan capped pay for executives at the very worst-off companies borrowing from the government at $500,000 a year, but left employers open to award millions in long-term restricted stock bonuses. Now Congress has shut that loophole by requiring that bonuses for executives at companies receiving money from the Troubled Asset Relief Program be no more than one-third of their total annual compensation, and come only in the form of restricted stock. Congress' restrictions also apply to all companies taking emergency government aid, adding hundreds of companies to the group the President singled out.

Other provisions include restricting any bonus payments until Uncle Sam is repaid, eliminating golden parachutes to departing executives, requiring bonuses be paid back to the Treasury if misleading earnings or other financial information is reported, and a mandatory "Say on Pay" in which shareholders will vote annually to approve executive compensation at all companies receiving money from TARP.
Sliding Scale

At firms receiving less than $25 million in government rescue assistance, the limits would apply to the highest-paid employee. Those who get $25 million to $250 million would see limits applied to at least the five most highly compensated executives. That doubles to the 10 highest-paid for those receiving between $250 million and $500 million, and doubles again to the top 20 employees of any company (currently including most banks and insurer American International Group (AIG)) that receives $1 billion or more, though generally traders and investment bankers appear to be exempt.

According to Equilar, which tracks executive compensation, companies with $10 billion or more in assets that took taxpayer money from TARP paid their CEO an average of $11 million last year, including an average cash bonus of $2.5 million.

Groups in line with business thinking voiced relief at Congress' decision not to put the compensation ceiling at $400,000, including the Center on Executive Compensation, which quickly praised that move.
Will Top People Flee?

But pay consultants continue to fret that these moves will result in a damaging exodus of top banking talent. "The banks will be forced to choose between keeping their top talent and accepting the benefits of government funds," says David Wise, a pay consultant at Hay Group. "The focus of the banks will be on repaying the taxpayers as quickly as possible. But ultimately what's going to be in taxpayers' best interest is for these banks to perform over a long period." And that, he notes, is hard to do without top-notch people. "Some of the objectives feel right but implementation doesn't," he says.

Those pushing for restraints on executive pay liked the new restrictions, but still argue even these restrictions don't go far enough. "I am afraid that Congress missed a huge opportunity to protect taxpayers from further bailout profiteering," says Sarah Anderson, a pay expert at the Institute for Policy Studies. "The biggest weakness of the stimulus bill is that it fails to set a clear, measurable limit on all compensation. This opens the door for boards to shift compensation from bonuses to other pots, such as salary, pensions, deferred compensation, and perks."

Anderson and others will continue to beat the drum for more pay restrictions. The Institute for Policy Studies has already met with the Obama Administration about the President's promise to investigate executive pay. "We have a social responsibility in the United States to restrain excessive CEO pay," says Institute associate fellow Sam Pizzigati. "We don't depend on corporate boards to make sure companies don't dump toxic waste into our rivers, or to make sure employers don't discriminate against women or people of color. And we don't think we should rely on corporate boards to handle executive excesses."

Ex-Employees at Heart of Stanford Financial Probe

By Matthew Goldstein

Billionaire R. Allen Stanford's worst enemies may be some of the former employees who once worked for his $50 billion Stanford Financial Group.

For months now, securities regulators have interviewed dozens of former employees of Stanford Financial, trying to get to the bottom of the firm's staple investment product: a high-yielding certificate of deposit issued by Stanford's offshore banking affiliate in the Caribbean island nation of Antigua. Over the past 12 months, the stock market and hedge funds have lost huge amounts of value even as Houston-based Stanford Financial continued to pay out above-average returns

A number of former brokers that regulators are talking to are ones who previously filed industry arbitration claims, alleging that they were forced out of the fast-growing firm after questioning the ability of Stanford International Bank to justify those high CD rates. Indeed, it appears the firm had a habit of playing hardball with anyone who criticized the business model and took exception with its aggressive practice of selling CDs to wealthy investors in the U.S., the Caribbean, and Latin America. Several former brokers say they were often told to stop asking questions whenever they pressed for more information about the bank's investment strategy for the money it took in from depositors.
Lawsuit Alleged a "Ponzi scheme"

One former employee even went so far as to file a so-called private whistleblower lawsuit in 2006 against the 58-year-old Stanford and his firm. The lawsuit filed by Lawrence J. De Maria alleged a myriad of wrongdoing at Stanford Financial and its Antigua-based bank. De Maria, who had been hired in 2003 to edit the firm's internal corporate magazine, a glossy publication called Stanford Eagle, claimed he was fired "for objecting to and raising concerns" about the firm's practices that he believed "violated federal and state laws."

Specifically, De Maria, a former newspaper journalist, charged the firm "was operating a Ponzi scheme or pyramid scheme" by using money from the offshore bank "to finance its growing brokerage business." The lawsuit, filed in in 2006 in Miami-Dade County Circuit Court in Florida, also charged the firm was attracting clients to the bank by selling CDs with "artificially high yields." De Maria, also a former president of the Staten Island Chamber of Commerce in New York, said in his suit that the more questions he asked about the company's business practices, the more "marginalized" he became. De Maria was dismissed on Dec. 6, 2004.

Stanford and his firm vigorously litigated the lawsuit and denied the allegations. But on the eve of trial, the case settled on Dec. 12, 2007, for an undisclosed sum of money. The firm, which had not shown a willingness to settle the case, apparently became interested in resolving the matter after the judge gave De Maria's lawyer permission to depose Stanford. "Mr. Stanford was initially a party to the lawsuit, but he was dropped from the lawsuit by the plaintiff," says a firm spokesman, who also pointed out that De Maria was not involved with any financial activities at the firm. Dana Gallup, the Hollywood (Fla.)-based lawyer who represented De Maria, says both he and his client are barred from discussing the settlement.
SEC Investigation Goes Back Three Years

BusinessWeek previously reported that the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Florida Office of Financial Regulation all are investigating the high-yielding CDs sold by Stanford's offshore bank, as well as the investment strategy behind them. FINRA and Florida regulators began investigating Stanford Financial and its banks within the past several months. But people familiar with the probes say the SEC investigation goes back at least three years and possibly longer. A Stanford Financial spokesman, meanwhile, has characterized the investigations as "routine." The company also has said that former disgruntled employees are trying to fuel the investigations.

It's not clear if De Maria is one of the former employees that regulators have interviewed. But due diligence expert Randy Shain says De Maria's lawsuit was one of the many red flags that he turned up during an investigation of Stanford's bank that he did on behalf of a client. Shain, vice-president of First Advantage Investigative Services, says the client was considering investing some money in the CDs sold by Stanford bank. Shain says the allegations in the lawsuit mirrored too many of the concerns raised by other former employees of Stanford Financial. And that was enough, for him, to tell his client to consider putting his money elsewhere.

"There was a tremendous amount of people saying the same thing," says Shain. "This warranted our client taking a much closer look." It appears regulators are doing much the same themselves.

News You Need to Know 3

Steve's Health Report

Will this finally allow Apple (AAPL) investors to sleep nights? After fretting about Steve Jobs' evident weight loss over the past year, they got reassurance in the form of an open letter from the Apple CEO on Jan. 5. Jobs blamed a "hormone imbalance" that is "robbing me of the proteins my body needs to be healthy." Treatment, he said, will be "simple and straightforward," and he will remain on the job. Doctors who treat patients in similar circumstances—Jobs had surgery for a rare, less lethal form of pancreatic cancer in 2004—say he has an excellent prognosis. Apple the next day announced new policies for iTunes, the top online music store. It will now sell songs for as little as 69 cents, and soon they'll all be free of copy protection.

See "Was Apple 'Adequate but Late' on Jobs?"

—Edited by Harry Maurer & Cristinal Linblad

One Big Downturn

Get set for "the first truly global recession of the modern economy." So writes Stephen Roach, chairman of Morgan Stanley Asia. Roach says that while the crash began with the U.S. subprime meltdown in the summer of 2007, "there were bubble-dependent growth models in a surprisingly large number of countries—all now bursting." Asia's export bubbles, for instance, were inflated by the U.S. consumer-spending bubble. So he expects the recovery to be slow and anemic at best. (Foreign Policy)

—Edited by Harry Maurer & Cristinal Linblad

Scandal at Satyam

Just what Corporate India didn't need right now: an accounting scandal at one of its star outsourcers. On Jan. 7, Ramalingam Raju, chairman of Satyam Computer Services, quit and admitted he had cooked the books. Raju said he had overstated cash on hand by $1 billion and inflated profits and revenues in last year's September quarter. Satyam shares sank 78%, and the benchmark Sensex index lost 7.3% that day, as other outsources fretted about how the news would affect their reputations.

See "India's Madoff? Satyam Scandal Rocks Outsourcing Industry"

—Edited by Harry Maurer & Cristinal Linblad

Natural Gas Face-Off

It's turning into an annual affair: Russia's Gazprom and Ukraine fighting about the price of natural gas. But this time matters got out of hand, and on Jan. 6, Russian Prime Minister Vladimir Putin cut off deliveries to Europe through Ukraine. At one point the two countries weren't far apart—Ukraine said it would pay $235 per 1,000 cubic meters, just $15 less than Russia wanted. So why couldn't they make a deal? Some experts suspect corruption is playing a role.

See "Ukraine and Russia: The Role of a Middleman"

—Edited by Harry Maurer & Cristinal Linblad

Citgo's About-Face

Propaganda is a tricky business. For three cold winters, Venezuelan President Hugo Chávez took delight in distributing free or discounted heating oil to poor families in the U.S. while lambasting President George W. Bush. But on Jan. 5, former Representative Joseph P. Kennedy II, whose Citizens Energy administered the program for Venezuelan-owned Citgo, announced that falling oil prices had prompted the company to ditch the largesse. Whoops—two days later, Citgo said it would continue the program after all, offering 100 gallons for free.

—Edited by Harry Maurer & Cristinal Linblad

News You Need to Know 2

Whitman Eyes a Run

So what will they call her—The Auctionator? It sure looks as if former eBay CEO Meg Whitman will make a bid to succeed Arnold Schwarzenegger, who can't run again, as California's governor. According to a source close to Whitman, who left eBay (EBAY) earlier this year as the online marketplace struggled, she will make a decision on the 2010 race in four to six weeks. In preparation, she resigned on Jan. 6 from the boards of eBay, Procter & Gamble (PG), and DreamWorks Animation (DWA). Whitman got a taste for politics when she worked on the Presidential campaigns of former boss Mitt Romney and John McCain.

—Edited by Harry Maurer & Cristinal Linblad

Red Ink at Time Warner

Last year was ugly for a lot of companies, including Time Warner (TWX). But it got a whole lot uglier for the media giant on Jan. 7, when it said it would post a net loss for 2008 instead of previously projected profits. It added that it would likely take a $25 billion impairment charge for the falling value of some businesses, including cable and AOL (TWX). Reasons for the red ink: a legal judgment against the Turner Broadcasting unit; a charge related to a lessee declaring bankruptcy; and building up reserves for potential losses from customers who have gone under.

—Edited by Harry Maurer & Cristinal Linblad

The CEO Carousel

More bad news from the chicken coop: A month after Pilgrim's Pride (PGPDQ) filed for bankruptcy, the CEO of rival Tyson Foods (TSN) quit on Jan. 5. Dick Bond's exit came as Tyson old-timers such as Don Tyson, son of the founder, and his ally Leland Tollett have recently reasserted authority over the nation's No. 2 chicken processor, whose stock has dropped by half since April as the meat industry suffers its most rotten stretch in decades. Tollett, 71, was named interim CEO. Another corner office changed hands the same day as beleaguered bookseller Borders Group (BGP) replaced George Jones with Ron Marshall, 54.

—Edited by Harry Maurer & Cristinal Linblad

IndyMac's New Owners

It's a star-studded lineup: hedge fund heavy-hitters George Soros and John Paulson, plus computer king Michael Dell. They're on the team of investors who agreed on Jan. 2 to buy failed IndyMac bank from the feds. The buyers will pony up $1.3 billion in new capital for a bank with 33 branches and $16 billion in loans.The FDIC will absorb losses above a certain level, and the group will continue the process of tweaking mortgages for 46,000 IndyMac borrowers behind on their payments.

—Edited by Harry Maurer & Cristinal Linblad

Death of a Billionaire

As the German government squabbles over a stimulus package that should bring more money into consumers' pockets, the credit crunch claimed a prominent victim. Adolf Merckle, 74, estimated to be the fifth-richest man in Germany, killed himself on Jan. 5 by throwing himself under a train. Merckle's holding company, VEM, which encompassed outfits such as generic drugmaker Ratiopharm and HeidelbergCement, was in trouble after Merckle lost hundreds of million of euros speculating on VW shares, while the downturn caused HeidelbergCement shares to plunge. For months, Merckle had been pressed by banks to find bridge loans or sell his core businesses.

—Edited by Harry Maurer & Cristinal Linblad

News You Need to Know 1

Obama Hits the Hill Running

There may be only one President at a time, but for now there appear to be two. Barack Obama arrived in Washington on Jan. 4 and jumped right into negotiations with Congress over an economic stimulus package. Aides say the President-elect is pressing for about $775 billion worth of stimulus over two years, including some $300 billion in tax relief for individuals and businesses. Balanced budgets? Forget about it. On Jan. 6, Obama said: "Potentially, we've got trillion-dollar deficits for years to come." The tax cuts in the package should win over some Republican lawmakers. Struggling sectors such as autos, banking, and homebuilding are excited that Obama may support a measure giving them refunds on past years' taxes. It would lengthen the period for money-losing companies to write off operating losses against previous profits from the current two years to four or five.

—Edited by Harry Maurer & Cristinal Linblad

Cutbacks at Alcoa

Only a year ago, Alcoa (AA) was getting scolded for not expanding fast enough as commodity markets boomed. Now, with aluminum prices down by half from last summer as customers slash orders, the top U.S. producer said on Jan. 6 it will cut 15,000 jobs, or 15% of its global workforce. It will also chop capital spending by 50% this year. Another commodity biggie is ailing even more: Chemical maker LyondellBasell put its U.S. unit into Chapter 11 on Jan. 6.

—Edited by Harry Maurer & Cristinal Linblad

Chipped Chipmaker

Next in the parade of companies unveiling nasty numbers: Intel (INTC). Having already forecast, on Nov. 12, its biggest quarter-on-quarter sales drop, the chip king on Jan. 7 said it now expects fourth-quarter revenue to be worse yet: $8.2 billion, down nearly $2 billion from forecasts in the fall and 20% from the third quarter. Demand for PCs and servers is cratering. Also on the tech front, Verizon Wireless surprised nearly everyone by saying on Jan. 7 that it will tap Microsoft (MSFT), not Google (GOOG), for search and ad services on its phones.

See "Intel Sales Take a Nosedive"

—Edited by Harry Maurer & Cristinal Linblad

Detroit's December

Be careful what you wish for. Carmakers couldn't wait for 2008 to end: U.S. auto sales sank 35% in December, closing out an annus horribilis that saw 13.2 million vehicles roll off the lot, the fewest since 1992. Making matters worse, soaring fuel prices last summer scrambled truck sales, where Detroit makes its richest margins. For the first time since 2000, Americans bought more passenger cars than trucks. Even mighty Toyota Motor (TM) says it will lose money this year. In fact, Toyota's sales are so skimpy that on Jan. 6 the company said it would idle 12 plants in Japan for 11 days in February and March to keep inventory from piling up. And that's the problem. As bad as 2008 was, it might look good compared with 2009.

—Edited by Harry Maurer & Cristinal Linblad

CEO Pink-Slip Watch

By Nanette Byrnes

In terms of job security, America's corporate chiefs are coming off a good year. As layoffs among rank-and-file employees surged to multi-decade highs, CEO turnover actually dropped.

That could change in 2009 as boards that were reluctant to fire leaders at the height of the credit crisis face more shareholder pressure. For many CEOs, 2009 could be a make-or-break year. "If you're in a growth cycle and your company is in the bottom half of its industry, that's not so good, but [at least] you're still growing," notes executive coach Marshall Goldsmith. "If your whole industry is tanking and you're in the bottom half, it becomes a lot harder to massage the numbers."

One high-profile laggard is Brenda C. Barnes, who heads Sara Lee (SLE). The food company's share price decline and operating margins were among the worst in the industry in 2008. Barnes recently announced that Sara Lee will cut 700 jobs, but weakness in Europe threatens to derail her efforts to boost profits in 2009. "She has a lot to prove," says Marian L. Kessler, a portfolio manager and analyst with the Becker Value Equity Fund (BVEFX), who praises Barnes' focus on higher-margin businesses but says investors are wary of the company's frequent restructurings. "Brenda has been CEO since 2005 with not a great deal of success," says Kessler. Sara Lee declined to comment.

Chief executives of retailers with high debt levels are especially vulnerable, says retail consultant Howard Davidowitz. He points to Terry J. Lundgren, CEO of Macy's, as someone who needs to make significant progress after poor 2008 results and the ill-timed acquisition of May Co. "It's life or death," says Davidowitz. A spokesman for Macy's disputes the idea that Lundgren is under pressure, saying the company has outperformed competitors by some measures and has strong cash flow. Another CEO who Davidowitz says may feel pressure is Neiman Marcus chief Burton Tansky. The high-end retailer in December posted an 84% quarterly profit plunge. "The question," says Davidowitz, "is whether Tansky is enough of a change agent in a time when luxury is absolutely out of step with the consumer." Neiman declined to comment.

Perhaps the most obvious place to find CEOs on the hot seat is the financial sector. One who could feel pressure in 2009 is Morgan Stanley (MS) chairman and CEO John J. Mack, who returned to lead the firm in 2005 and quickly embraced riskier strategies that came back to bite him in 2008 as the financial crisis worsened. Morgan also lost market share in the mergers-and-acquisitions business. Mack is expected to retire when his contract expires in 2010, but some say poor results this year could prompt calls for an earlier exit. Michael Garland, a director at CtW Investment Group, says the issue of Mack's status will be raised this spring. Morgan Stanley declined to comment.
"DEARTH OF TALENT"

American International Group (AIG) wasn't the only insurer to be battered in 2008. Hartford Financial Services Group chief Ramani Ayer has to answer for more than $2 billion in losses in the firm's portfolio last year, not to mention high executive churn. Given all of the blowups in the finance sector already, it's not easy to see who might step into vacant roles. Says Jeffrey W. Arricale, portfolio manager of the T. Rowe Price Financial Services Fund (PRISX): "There's a dearth of talent." Hartford declined to comment.

Citigroup (C) chief Vikram Pandit, meanwhile, is at what one headhunter calls "the tipping point." He needs to clean up the bank's finances quickly—and show that taxpayer money is being well spent. A Citi spokeswoman says the bank remains focused on Pandit's strategy of dumping bad assets and cutting costs. Pandit took over in 2007, before the full extent of Citi's problems became clear. Even executives who prepare for trouble ahead can be swept up in events beyond their control. Says Arricale: "It's not like [Pandit] planned any of this."

How Our Best Managers Have Fared Over the Years

By Peter Carbonara

Flipping through BusinessWeek's past surveys of the best managers is a lot like taking a peek at your high school yearbook. It evokes nostalgia, pride, and—on occasion—embarrassment.

Sure, we lauded Jamie Dimon back in 2003, predicting the Bank One CEO "may deal his way into greatness." Six years, two big acquisitions, and one financial crisis later, Dimon runs the largest bank in the U.S. by market value, JPMorgan Chase (JPM). He's also one of the few big bankers whose reputation remains intact.

We were also right to criticize Gerald Levin, the chief architect of the megamerger between Time Warner (TWX) and America Online (TWX), back in 2002. The conglomerate is still struggling to prove the online service provider makes sense as part of a media company. Levin now runs a holistic mental health center in Santa Monica, Calif., which the company's Web site describes as a place to "revel in the wonder of you."

There are, however, lots of choices we'd rather forget. In 2002 we singled out Dennis Kozlowski, then head of Tyco International (TYC), as one of the best managers for his "relentless dealmaking and lean operating style." Unfortunately the "lean" style also included his $30 million New York condo and its now-infamous $6,000 shower curtain. Kozlowski is currently serving an 8- to 25-year sentence for fleecing his former company.

We highlighted Lehman Brothers (LEH) CEO Dick Fuld as a best manager in 2002 for consistently "proving naysayers wrong." He wasn't a bad call at the time. After all, he fought insolvency rumors triggered by the collapse of hedge fund Long-Term Capital Management in 1998 and silenced skeptics after the September 11 terrorist attacks left Lehman homeless. But years later, Fuld's tough-as-nails attitude seemed more delusional than inspirational in the face of the crisis. He told anyone who would listen that the bank had plenty of capital—right up to the point when Lehman filed for bankruptcy this past September.

ARMs DEALER
In 2004, Ken Thompson, then CEO of Wachovia (WB), got kudos from us after a string of acquisitions. The industry veteran, we noted, "has rewritten the book on bank mergers." That turned out to be true—just not in a good way. Thompson's hurried acquisition in 2006 of Golden West Financial, a big California bank crammed with risky adjustable-rate mortgages, was a fiasco. Thompson was forced out last year, and a wounded Wachovia was swallowed up by Wells Fargo (WFC).

After transforming UnitedHealth Group (UNH) from a regional medical insurer into a diversified health-services giant, William McGuire rocketed to the top of our annual roundup in 2004. Three years later the former pulmonologist paid $468 million to settle allegations by the Securities & Exchange Commission that he received a slew of backdated stock options.

Some of our top picks have more ambiguous legacies. Consider Maurice "Hank" Greenberg. We applauded the autocratic leader of American International Group (AIG) in 2002 for turning the company into a financial giant and championing "innovative products that insure almost any type of risk." Greenberg, however, was forced out in 2005 amid allegations of fraud by the New York state attorney general—charges he contests to this day.

But Greenberg's successors bear the brunt of the blame for AIG's current state. As the housing bubble inflated, AIG pushed aggressively into credit default swaps, insuring some $426 billion worth of debt, including subprime mortgages. After those deals began to sour, the government had to come to its rescue.

Which crusading regulator brought down Greenberg back in 2005? None other than Eliot Spitzer, whose probes into investment banks and mutual fund firms helped change Wall Street's ways. In 2004 we saluted Spitzer for "wielding his staff of 1,800 like a battering ram against the fortress of Wall Street privilege." Spitzer rode the reformer image to the New York governor's mansion two years later, but in 2008 he resigned in disgrace after a dalliance with a high-priced prostitute. We had expected Spitzer to uncover the "next great scandal"—not to become it.

Wall Street: The Bright Side of a Bad 2008

By Roben Farzad and Ben Levisohn

Last year was that rare wrinkle in history when everything that could go wrong did go wrong. Stocks and real estate imploded. Bank failures abounded. Fannie Mae, Freddie Mac, and AIG became wards of the state, while the Federal Reserve had to double its balance sheet in the course of a few weeks.

Oh, and Wall Street as we knew it pretty much died.

But the crash was good in one small (O.K., minuscule) sense: It separated the truly wise managers in finance from the highly paid pseudo-geniuses whose years of success turned out to be a bull market mirage. The few bankers and hedge fund pros who stuck to the basics of lending and investing during the mortgage boom are now inheriting the earth. Most of the rest are exploring other career options. With any luck, some of the physicists and engineers who flocked to trading floors in recent years will flock back to science labs to create things.
ASLEEP AT THE WHEEL

Where was the foresight? Almost all of the managers who were supposed to see the wreck coming did not. Most glaring were Bear Stearns' James E. Cayne and Lehman Brothers' Richard S. Fuld Jr., who morphed from bond gurus to credit casualties practically overnight. Much of the blame for the meltdown also lies with the phalanx of highly compensated executives just below the C-suite—the risk managers and trading chiefs who failed to avoid the carnage.

Two managers who did sidestep the crash are in position to help shape the future of banking. JPMorgan Chase (JPM) CEO Jamie Dimon got federal help to acquire Bear Stearns and Washington Mutual and now sits at the helm of a dominant global firm. Bank of America's (BAC) Kenneth D. Lewis snatched Merrill Lynch (MER) from the jaws of bankruptcy, a move that could vault BofA near to the top of investment banking.

And what of the supposed sophisticates managing the world's biggest hedge funds? Most of them blew it, too. Now some are closing up shop—and throwing hundreds of onetime masters of the universe out of work. Chicago's Hedge Fund Research says hedge funds lost an average of 19.4% through November as billions of investor dollars fled. SAC Capital Advisors saw its Multi-Strategy Fund lose 13% through November, even though the fund is supposed to make money in any environment. The two main funds of Kenneth C. Griffin's Citadel Investment Group were hit with $1.2 billion in withdrawal requests.

Most hedge funds charge clients 50% of their profits and 2% of assets under management. None has agreed to refund to clients half their losses, but Renaissance Technologies' James Simons has waived the management fee for his year-old futures fund, which lost 12% in 2008. Perhaps he has started a trend.

The small winner's circle included longtime subprime skeptic John Paulson, whose largest fund returned 38% through Dec. 19. But the biggest hedge fund victor may be James Chanos, whose Kynikos Associates (Greek for cynic) shorted its way to a 50%-plus gain through November. That, of course, is cold comfort for the millions of ordinary investors who had their money in stocks.

Return to the Best Managers Table of Contents

BusinessWeek Senior Writer Farzad covers Wall Street and international finance. Levisohn is a staff editor at BusinessWeek covering finance and personal finance.

DuPont's Swift Response to the Financial Crisis 2

Holliday had to weigh whether the gathering financial storm was serious enough to warrant implementing the plan or whether declaring a crisis might frighten the company's 60,000 employees needlessly. As the evidence of a deepening economic downturn quickly mounted, he decided that activating Corporate Crisis Management was right.

Immediately, 17 standing teams met at DuPont headquarters. Over four days of meetings, it became clear that the nature of the crisis was strictly financial, and eight teams—those that dealt with such issues as security and plant safety—stood down. At the end of the four days, the remaining nine had determined what needed to be done to ensure DuPont's viability. It was time to let the troops around the world know what was going on.

Holliday enlisted the company's chief economist and the head of its pension fund, both of whom are highly regarded in the organization, to explain in nontechnical language the roots of the crisis and the way it was affecting DuPont. The pension fund manager also took time to develop some instructional material advising employees about investment options for their $18 billion in retirement funds.

Within 10 days of the crisis plan's creation, every employee in DuPont had a face-to-face meeting with a manager who explained what the company needed to accomplish. Employees were asked to identify three things they could do immediately to help conserve cash and reduce costs. Within a few days after the communications program was rolled out, the company conducted polling to see how well employees understood the nature of the crisis and to determine their psychological reaction. Were they scared, or were they energized and ready to confront the crisis? The company also wanted to see whether the rank and file were doing what they needed to be doing.
TOO CONFIDENT?

Overall, the employees seemed to get it. It helped that the news media were full of stories about the developing financial crisis. The actions aimed at conserving cash took hold quickly. Travel was curtailed sharply, internal meetings were canceled, and consultants and contractors were eliminated where possible.

Yet Holliday felt people still didn't grasp the urgency with which they needed to be acting. "In hindsight, maybe we were too good at giving them the reassurance and confidence that we could come through this," Holliday says. "We gave them so much confidence that they just weren't responding as fast as the slowdown demanded."

Together with his chief operating officer and chief financial officer, Holliday took the time to spend an hour and a half with each of the company's top 14 leaders. They were asked to explain what they were doing to cope with the crisis. They all brought long lists, and it seemed they were doing a lot. But the problem was how fast it was getting done. "They were talking about things that would be implemented by January or February, but they were things we needed implemented in October," Holliday says. So Holliday and his senior team assigned the executive vice-presidents sharply revised targets for cost, working capital, and other metrics for the rest of 2008 as well as the first quarter of 2009.

Even as immediate measures were being taken, DuPont had three top executives looking at longer-term actions the company needed to embrace. It would take a while to figure out which production facilities could be closed permanently or shut temporarily to reduce costs. So the fastest way to save the most cash was to cut back as much as possible on the more than 20,000 outside contractors the company was using. In most cases a contractor could be released with one week's notice and without any severance costs. Where possible, employees whose operations were slowing or would be closed were shifted into what was formerly contract work.

DuPont's initial reaction to the spreading crisis took place in less than six weeks. There will be much more to do, depending on how the global economy fares over the next year or two. And when the slowdown ends, Holliday predicts that inflationary trends will reassert themselves. But DuPont will be ready for resurgent inflation—and any other emergency—if and when it happens.

The lesson CEOs should draw from Holliday's experience: You must recognize reality. This is the single most important task confronting a CEO, and it is extremely difficult to do in this environment. Facing wrenching uncertainty, many become fearful. Others indulge in wishful thinking: "We'll soon be back to normal." Don't believe it. Though we don't know what the new world will look like, we can be certain it won't look the way it did before.

Return to the Best Managers Table of Contents

Ram Charan, co-author of the international best-seller Execution and an adviser to business leaders and corporate boards worldwide, is the author of Leaders at all Levels: Deepening Your Talent Pool to Solve the Succession Crisis, to be published by Jossey-Bass in December, 2007.

DuPont's Swift Response to the Financial Crisis 1

By Ram Charan

In Leadership in the Era of Economic Uncertainty: The New Rules for Getting the Right Things Done in Difficult Times (McGraw-Hill), renowned management consultant Ram Charan offers chief executives a detailed guide to surviving the worst financial and business crisis since the Great Depression. The key, Charan says, is "management intensity"—deep immersion in the operational details of the business and the outside world, combined with hands-on involvement and follow-through.

Plans and progress must be revisited almost daily. Big-picture, strategic-level thinking cannot be abandoned, but every leader now must be involved, visible, and in daily communication with employees, customers, and suppliers. In this world, CEOs need detailed, up-to-date, and unfiltered information. And they have to act decisively when trouble looms. "If you don't prepare for the worst," says Charan, "you will put both your company and career at risk."

What follows is an excerpt from Charan's book that describes how one of his major clients, chemical and life sciences giant DuPont (DD) , has responded to the crisis. CEO Charles O. Holliday Jr. reacted with maximum speed, rallied his entire company to confront the emergency, and put a sharp focus on maintaining cash flow, which Charan considers the lifeblood of any company in a severe downturn.

The first clear sign that the economic crisis was spreading globally came to DuPont CEO Chad Holliday in early October of last year, while he was visiting a major customer in Japan. The CEO of the Japanese company, among the largest and most highly regarded in its global industry, told Holliday he was worried about his company's cash position. The Japanese boss had ordered his executives to conserve cash in case the financial contagion affected his ability to raise capital.

That conversation was a wake-up call. When Holliday's plane landed back in the U.S., he immediately summoned the six top leaders in his company to a meeting at 7 a.m. the next day. He asked them the following questions: How bad is it now? How bad could it get?

The answers that came back over the next few days were grim. The financial industry's problems were pervading many aspects of DuPont's business both at home and abroad. What had seemed to be a crisis of confidence on Wall Street had the potential to become a global crisis as panic swept Western Europe, Russia, and most of Asia. Credit was disappearing, leaving companies struggling to finance their operations.

Evidence of how serious the problems were becoming appeared in different places. Wilmington, Del., where DuPont has its headquarters, is usually a hotbed of legal activity: Many companies are chartered in the state, and corporate lawsuits are routinely filed in Delaware Court of Chancery in Wilmington. Yet bookings at the hotel DuPont owns in the city's downtown had plunged more than 30% in 10 days. Lawyers handling litigation for companies had canceled their reservations when their clients decided to settle their disputes and stop incurring legal fees.
SPRINGING INTO ACTION

More telling was the rate at which production at many companies was slowing. DuPont paint covers more than 30% of all American automobiles, and the company generally manufactures the paint less than 48 hours before it is sprayed on new cars. To maintain such a short lead time, the automobile companies share their production schedules with DuPont. Suddenly there weren't any production schedules. The automakers didn't know what they were going to produce in the face of collapsing sales.

Clearly it was time to take action.

DuPont has long stressed the paramount importance of contingency planning. Its Corporate Crisis Management plan, if invoked, instantly brings together senior managers to appraise the cause of the crisis and put appropriate disaster control procedures in place. The plan is seldom activated. It was used in the wake of the September 11 attacks and in the aftermath of major hurricanes.

Managing Through a Crisis: The New Rules 2

In just one year, the difference in the cost to borrow between a typical investment-grade company and a noninvestment-grade company has tripled.

Getting to financial health will require sacrifice, from selling off assets at bargain prices to issuing stock in a down market. "If your stock was at $50, it may not feel good to issue stock when it is $20," says Marc Zenner, managing director at J.P. Morgan's (JPM) Capital Structure Advisory & Solutions group. "But if you don't do it, the situation could be a lot worse."

Washington (D.C.)-based power utility Pepco Holdings (POM) chose to raise the nearly $1.6 billion it needed for infrastructure spending this year by issuing shares and bonds three months ago when markets were in flux. Chief Financial Officer Paul Barry worried that raising money in 2009 could be even harder. "We just bit the bullet and went ahead and got it done," he says. Now Pepco is well positioned to improve its reliability by building transmission lines.
MAKE A MOVE FOR MARKET SHARE

The pie is getting smaller, and less nimble rivals are getting weaker. Don't wait for your competitors to fall to the ground. Hire away their best people while taking steps to make sure they don't grab yours. Or buy assets from cash-strapped rivals on the cheap. Take steps to solicit new customers at a time when others are cutting back on service.

Abandon strategies or products that don't fit the core business. Wal-Mart (WMT) last year jettisoned its policy of stuffing a wide variety of products into stores to broaden its appeal. Instead, the world's largest retailer focused on simplifying its mix and lowering prices of its most popular products, according to Chief Merchandising Officer John Fleming. The result: more share in hot-selling categories like flat-screen TVs.
RETHINK YOUR REWARD SYSTEM

It's tempting to cut compensation across the board. Now is the time to differentiate more than ever and focus on rewarding your best. If you have to cut costs, start at the top. When FedEx (FDX) CEO Frederick W. Smith announced broad salary cuts last month, he took the largest hit, with a 20% pay cut. As New York-based organizational psychologist Ben Dattner says: "The last thing you want is for people to perceive that you're in it for yourself."

If you can't give staff more money, look for ways to give them more power. Shell Refining (RDS), for one, singled out top supervisors at its Port Arthur (Tex.) refinery last year and asked their advice on how to improve the plant's performance. The result was higher morale, according to refinery general manager Todd Monette, and a 30% reduction in unplanned maintenance work.
DARE TO INNOVATE

Innovating now can leave you nicely situated for a turnaround. Pfizer broke apart both its research and business units last year to help spur new ideas. Corey Goodman, head of Pfizer's Biotherapeutics & Bioinnovation Center in San Francisco, says the move has made "Pfizer more efficient and more entrepreneurial."

For those who are willing to take some risks, 2009 can be a time of great possibilities. "A leader is someone who doesn't do what everyone else does," says Richard S. Tedlow, a professor of business administration at Harvard Business School. "If you have a product you believe in, now is the time to make a bigger investment—not a smaller one."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network
Profits of Doom

There is plenty of literature on making the most of a crisis. Some standouts: Winning in Turbulence, by Bain consultant Darrell Rigby, and Boston Consulting Group's "Collateral Damage" essay series, which suggests ways to survive the year ahead. Meanwhile, Alexander J. Field, a professor at Santa Clara University, bucks conventional wisdom with a paper calling the Great Depression "the most technologically progressive decade of the century."

To check these out, go to http://bx.businessweek.com/management-ideas/reference/

Return to the Best Managers Table of Contents

Thornton is a senior writer for BusinessWeek.

Managing Through a Crisis: The New Rules 1

By Emily Thornton

What do Carnegie Steel and Hewlett-Packard (HPQ) have in common? Both were born at a time when people thought the world was falling apart. Andrew Carnegie launched his first steel mill during the Panic of 1873, the start of a long depression. He took advantage of low costs to build an industrial giant that made him the world's richest man. Bill Hewlett and Dave Packard showed similar courage when they launched HP from a Palo Alto (Calif.) garage toward the end of the Great Depression.

History has shown that crisis breeds opportunity. Business leaders may have to cut costs to survive 2009, but the smart ones are also out there looking for prospects. They are willing to take the type of bold move that IBM (IBM) made during the recessionary days of 1981 when CEO John R. Opel aggressively rolled out the company's landmark personal computer just as PC demand soared. Even in the current downturn, there are companies like AT&T (T), which recently announced plans to buy two companies for a total of $1.2 billion. "A recession creates winners and losers just like a boom," observes Mauro F. Guillen, a professor of international management at the University of Pennsylvania's Wharton School.

Managers are now dealing with everything from shattered consumer confidence to tighter credit, not to mention the likelihood of a tougher regulatory environment. Decisions that made sense two years ago may prove disastrous in this climate—from giving outsize rewards to those who take big risks to borrowing heavily just because interest rates are low. Years of excessive borrowing have taken a toll: An unprecedented two-thirds of nonfinancial American companies covered by Standard & Poor's have speculative-grade, or junk-rated, debt. (S&P, like BusinessWeek , is a unit of The McGraw-Hill Companies (MHP).) On the whole, U.S. businesses face a $238 billion wave of debt maturities that will come due by the end of 2009. "Many companies are questioning their survival," says Gerry Hansell, a senior partner at Boston Consulting Group.

Executives have to lead "their people out of a psychological funk and at the same time tailor their business to focus on a new reality," says management consultant Ram Charan. That's good advice during any business cycle but especially important today. Here are some new rules for managing through a tough 2009—and beyond:
CHANGE YOUR MINDSET

Money is scarce. Markets are volatile. Morale is harder to boost in an atmosphere of anxiety. Acknowledge to yourself and your team that the world has changed. Dennis Carey, a senior partner at Korn Ferry International (KFY), argues that now is the time to question every technique that worked during boom years. "You can't rely on a peacetime general to fight a war," says Carey. "The wartime CEO prepares for the worst so that his or her company can take market share away from players who haven't."

Many of the best managers in 2008 were gearing up for battle during good times. Mark Hurd at Hewlett-Packard, for example, has made drastic cost cuts, shed marginal businesses, and focused on playing to HP's strengths over the last few years. Jamie Dimon of JPMorgan Chase (JPM) made substantial changes that shored up his bank's balance sheet and left him ready to pounce as rivals fell.
GET YOUR FINANCIAL HOUSE IN ORDER

A key issue for many companies right now is getting the funds needed to help a business grow. Only those with strong balance sheets stand a chance. Everyone used to have easy access to capital. No more.

A year after $100, oil prices cut in half part2

Activity in the U.S. oilfield already reflects expectations for anemic demand. Baker Hughes Inc. reported Friday the number of rigs actively exploring for oil and natural gas in the United States fell by 98 last week to 1,623. That's nearly 16 percent fewer rigs at work than when oil prices peaked in July, and 9 percent below the year-ago figure.

The Department of Energy said Friday it plans to take advantage of the huge drop in crude prices and is soliciting bids to buy 12 million barrels of oil this year to replenish the nation's Strategic Petroleum Reserve. The reserve is an emergency depot maintained by the Energy Department and can hold as much as 727 million barrels of oil in salt caverns along the Gulf Coast. The DOE said the new supplies will replace those used after hurricanes Katrina and Rita severely crimped oil supplies in 2005.

The February contract for crude rose $5.57 on Wednesday, the last trading day of 2008, to settle at $44.60 after Russia threatened to cut off natural gas supplies to Ukraine. Russia followed through with that threat Thursday, though both countries pledged they would keep supplies to the rest of Europe flowing.

As of late Friday afternoon, no interruptions outside Ukraine were reported.

Analyst Olivier Jakob of energy analysis firm Petromatrix in Switzerland said Ukraine has enough reserves to avoid an immediate risk to its supplies, as long as both parties find an agreement by the end of next week.

The European Union depends on Russia for about a quarter of its gas, with about 80 percent of that delivered through pipelines controlled by Ukraine.

Concerns that the week-old conflict between Israel and Hamas in Gaza could disrupt supplies in the oil-rich Middle East helped keep prices from falling further.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months. Analysts say crude's direction in the early part of 2009 will be linked largely to whether the cartel adheres to the new quotas.

The national average at the pump rose slightly overnight but remains well below year-ago levels. The national average for regular unleaded rose eight-tenths of a cent to $1.626 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Still, prices are down 17.7 cents from a month ago and $1.426 from a year ago.

In other Nymex trading, gasoline futures rose 4.85 cents to $1.11 a gallon. Heating oil rose 3.8 cents to settle at $1.48 a gallon, while natural gas for February delivery jumped 24.9 cents to $5.971 per 1,000 cubic feet.

In London, February Brent crude rose $1.32 to settle at $46.91 a barrel on the ICE Futures exchange.

"If there is a disruption in natural gas supplies to Europe, then you will see an increase in the usage of oil instead of natural gas. It will have an impact on oil prices," Jakob said.

A year after $100, oil prices cut in half part1

By JOHN WILEN AP Business Writer | AP

Exactly one year after crude eclipsed $100 a barrel for the first time, 2009 trading began Friday with prices roughly half their year-ago levels, and some believe oil could be headed even lower.

Oil markets kicked off the new year with crude climbing above $46 a barrel. A variety of factors were likely at work, including continued violence in Gaza and expectations that OPEC would carry out its largest production cut ever to stem historic price declines.

Oil market activity was also light as many traders took a long holiday weekend, and that can lead to price swings.

"I have a feeling, more than anything, it's the thin trading conditions pushing the price higher," said Peter Beutel of energy consultancy Cameron Hanover.

Light, sweet crude for February delivery rose $1.74 to settle at $46.34 a barrel on the New York Mercantile Exchange.

Oil's surge into triple digits for the first time one year ago was the start of a climb that would peak above $147 a barrel by July. Since then, amid fears of a prolonged global recession and crumbling worldwide demand, crude prices have plunged more than 70 percent.

Gasoline prices ticked up a bit overnight, but the average price for a gallon of unleaded is still more than $1.40 cheaper than a year ago.

"Thank goodness that's over!" Raymond James & Associates said in a note to clients Friday, summing up what many traders feel after the most volatile year since crude futures were first offered on Nymex in 1983.

The same gloomy economic data that drove prices into the mid-$30s in the final month of the year continued into 2009.

A private group's measure of manufacturing activity fell more than expected in December, hitting the lowest reading in 28 years as new orders and employment continue to decline. The Institute for Supply Management, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December from 36.2 in November. Wall Street economists surveyed by Thomson Reuters had expected the reading to fall to 35.5.

Any reading above 50 signals growth, while a reading below 50 indicates contraction. The index has fallen steadily for the last five months.

A weakened manufacturing sector suggests demand for energy will not rebound any time soon.

Where to Locate Your Business part 2

Most small companies aren't simply looking for the cheapest place to do business, Ubalde says. Instead entrepreneurs tend to ask where they can find the best workers,, as Rousselle did. That's why cities like New York and San Francisco remain attractive despite their high costs, Ubalde says.

Aside from the labor pool, tax rates differ significantly from state to state, and they may be more important for small businesses with few employees. S-corporations and other companies that don't pay corporate income taxes can benefit from states that have low personal income tax. Moving from California to Washington state, for example, could save a small business owner 9% or 10% of taxable income, according to data from the Tax Foundation, a nonprofit Washington, D.C. research group.
Haphazard Approach Not Uncommon

Areas with low taxes often also have lower costs, and the combination can entice entrepreneurs who are priced out of places that are more in-demand, says Tax Foundation economist Josh Barro. "If you're looking for a place where you can start your small business with reasonable costs, you might not be able to do it in New York or New Jersey, but you might be able to do it in Florida," he says. (For a look at the Tax Foundation's list of 25 states with the lowest projected tax rates for 2009, flip through this slide show.)

Those small businesses in a position to create jobs can appeal to local economic development groups for help. Blaine Kern, CEO of forensics lab Human Identification Technologies, found an expansion site in September in Kirkesville, Mo., through Site Selection Network. The Mission Viejo (Calif.) company offers a free service that distributes proposals from companies to 162 economic development groups, who pay for membership in the network. Kern plans to hire between 100 and 200 workers there over the next five years. His current lab, in Redlands, Calif., has fewer than 20 employees and around $7 million in revenues. "If you look at our ability to lower price point and increase profit margin, the labor pool in Missouri is about 41% less expensive when it comes to salary," he says. That's savings on top of refundable tax credits from the state.

Small business owners have long taken a haphazard approach to choosing a location, says ZoomProspector's Ubalde, which puts them at a disadvantage. That might be a minor drag in good times, but in a downturn it can mean the difference between survival and failure. "For some businesses it's the difference of literally millions of dollars each way in affecting the bottom line," Ubalde says.

Tozzi covers small business for BusinessWeek.com.

Where to Locate Your Business part 1

By John Tozzi

Adam Rousselle needed to move. His firm, then based in Doylestown, Pa., uses sophisticated technology to identify trees that threaten to take down power lines, and demand from power companies was surging. By last summer, he expected to increase Utility Risk Management's eight-person staff with dozens of new engineers, programmers, and mathematicians. But 25 miles outside Philadelphia, his 3-year-old, $10 million company was too small a player to attract that much talent that quickly.

So in July, Rousselle relocated to the ski town of Stowe, in Vermont, a state with roughly the same population as Bucks County, Pa. He now has the attention of Vermont Governor Jim Douglas and other leaders in government, industry, and academia, all eager to bring technology jobs to a state heavily reliant on tourism. It's attention his small firm didn't get in Pennsylvania. "The governor came to welcome 18 people who came to my job fair," Rousselle says. He now plans to hire 26 people before the end of February.

Each year, entrepreneurs start or expand some 650,000 small companies, according to data from the Small Business Administration. Choosing the right place can mean the difference between profitability and failure. But few small business owners put the same care into locating their companies that Rousselle did, consultants who specialize in site selection say.
State Incentives a Plus

Large corporations typically pay professionals high fees to find the best location for new plants, offices, or stores. But the cost can be prohibitive for small companies, ranging from $50,000 to $125,000 or more. Small firms may hire consultants for key projects, but they more often work with local economic developers, says Mark Arend, editor of Site Selection, a trade publication covering the industry."

Rousselle considered three states besides Vermont to relocate Utility Risk Management: Michigan, Florida, and elsewhere in Pennsylvania. In the end, he says, the labor force, financial incentives, and support from state officials made Vermont the best fit. In addition to mobilizing state leaders to recruit for the company, Utility Risk Management will benefit from an estimated $380,000 in cash incentives through the Vermont Employment Growth Incentive program. Rousselle says he can get up to $5,000 per employee each year to train them in specific skills his customers want. And, he says, he can offer lower salaries than he needed to in Bucks County and still be competitive in the labor market.

The choice won't be as clear cut for most small business owners. Many factors affect whether a place is a good location for a particular business, including the labor force, tax rates, distance from suppliers and distributors, access to transportation, and the local market for the company's products or services. "Is there a perfect location? There is no such thing," says Anatalio Ubalde, co-founder of GIS Planning, a San Francisco company that analyzes geographic data for economic developers. "Is there a better location than another one? The answer is yes."
ZoomProspector Offers Free Help

GIS Planning launched a site three months ago called ZoomProspector.com, designed to help entrepreneurs find and evaluate potential sites based on what attributes of a place matter most to their business. Other Web sites like City-data.com provide local information, but Ubalde says ZoomProspector's proprietary data, much of it collected from the company's economic development clients, offers small business owners access to the same information large companies use when they decide where to site new locations. ZoomProspector is free for users and makes money by selling geographically targeted advertising, Ubalde says.

Mortgages: What You Need to Know in 2009 part 2

Check Your Finances

The hurdles to get one of those low fixed-rate loans are high because Fannie Mae (FNM) and Freddie Mac (FRE) have tightened standards for the loans they'll buy or guarantee, even though the two mortgage finance giants are now under government conservatorship. You'll need a FICO score of at least 720 for the best interest rate, although for a big enough fee Fannie and Freddie will guarantee loans with FICO scores down to the mid-600s. You may also need a down payment of 20%. In the boom times you could get a "piggyback" loan to shrink your down payment, but those are history. Even private mortgage insurance, which used to cover some of the financing gap up to 20%, is much harder to get now because the issuers have suffered big losses.

Lately, says LendingTree's Findlay, the highest hurdle for many buyers has been lenders' debt-to-income standards. Here are the numbers, as of late December, according to LendingTree: For a Fannie or Freddie conforming loan, monthly mortgage payments cannot exceed 28% of gross income, while all debt payments (including student loans, etc.) cannot exceed 36% of gross income.

For a Federal Housing Administration-guaranteed loan, the corresponding figures are 29% for mortgage debt and 41% for all debt.
Before Making an Offer, Get Pre-Qualified

Home sellers are likely to give you a better deal on a house if you're pre-qualified for a mortgage. Why? Because it shows you can get the deal done quickly. In this market, nothing burns a seller more than being strung along by a buyer who wants the house but can't qualify for a loan to buy it.
First-Time Borrowers: Get Credit Counseling

A lot of the mess we're in now could have been avoided if first-time home buyers had paid attention to warnings about getting overextended. If you don't want to listen to your parents or nosy brother-in-law, then visit a credit counseling agency. Says Rick Sharga, marketing vice-president at RealtyTrac: "Most people getting into the market for the first time seriously underestimate the cost of maintaining a home, from taxes to upkeep. What happens if that water heater blows? Do you have enough money to pay for it without missing a mortgage payment?"
Think Hard About Refinancing Now

The decision about when to refinance comes down to personal risk preferences. Of course, you should also run your numbers through one of the many online calculators (a rough rule of thumb is that it makes sense to refinance if the new rate is a full percentage point below your current rate and you don't plan to move soon).

The argument to wait, as expressed by BanxQuote.com President Norbert Mehl, is that the Federal Reserve and Treasury Dept. are determined to force mortgage rates lower in 2009 and are bound to have their way. Says Mehl: "The pressure on the banks will continue to mount to bring down interest rates, not just on mortgages but on all kinds of personal loans."

In contrast, LendingTree.com's Findlay says that while it's reasonable to guess that rates will fall more, nothing's for sure. "Rates have come down so fast that trying to pick the bottom is a mistake," he says. "Their propensity to slingshot back up is high." He votes for refinancing now if the numbers work.

So, pull the trigger or wait? Nobody but you can decide this one.

Coy is BusinessWeek's Economics editor.

Mortgages: What You Need to Know in 2009 part 1

By Peter Coy

With all the doom and gloom over housing, you might be surprised to know that this is a fantastic time to get a mortgage. Not if you have poor credit, to be sure. But you can get a great deal on a 30-year, fixed-rate, conforming loan these days if you have a solid FICO score, a manageable debt burden, and proof positive of a reliable income.

You have to go back to around 1961 to find a time when 30-year mortgages had rates this low, according to Keith Gumbinger, a vice-president at financial publisher HSH Associates in Pompton Plains, N.J. For that, thank the U.S. government, which is trying to jump-start the stalled housing market by buying up mortgage-backed securities. On Dec. 31, Freddie Mac reported that average rates on 30-year fixed mortgages dropped to 5.1% for the week, down about 1.3 percentage points since late October and the lowest since its survey began in 1971.

Rates are probably headed even lower in 2009, raising the question of whether you should borrow now or wait for a better deal. The experts are sharply divided over this one. Put it this way: If you're a gambler, wait. If you can't sleep at night worrying that rates will go up from here, borrow now.

Here are some key things you need to know about today's mortgage market:
Now More Than Ever, Shop Around

In ordinary times, one loan is about as good as another because most lenders' offers on 30-year loans are clustered within around a quarter of a percentage point. Not now. With the economy so shaky, lenders are all over the map in how much risk they're willing to take in making loans. So it really pays to shop around. And keep checking, because rates are constantly changing. One day in late December 2008, Wells Fargo (WFC) was offering 30-year conforming loans at 5.0% plus one point, while Bank of America (BAC) was offering the same kind of loan at 6.625% plus one point, according to Cameron Findlay, chief economist of LendingTree.com, a division of Home Loan Center. No offense to Bank of America, but only a sucker would have borrowed from it instead of Wells Fargo that day.
For New Loans, Get a Fixed Rate

Forget what you were told in quieter times about the pros and cons of fixed- vs. adjustable-rate mortgage loans. These days, all the best deals are on fixed-rate loans because that's the segment of the market that the government has been targeting with support. The securitization of adjustable-rate loans has mostly dried up, so banks don't want to originate ARMs, therefore they don't offer attractive rates on them, says HSH's Gumbinger.
If You Have an ARM, Keep It for Now

On the other hand, if you got an ARM in the past and it's coming up on an interest rate reset, don't rush to unload it. Short-term interest rates have gotten so low that you're very likely to see your monthly payment fall. Thank your lucky stars if your ARM happens to be indexed to the one-year Treasury bill, whose yield has fallen below half a percent. Even with the typical spread added on, you're still paying only around 3.25% a year, says Gumbinger. ARMs indexed to LIBOR (the London Interbank Offered Rate) are resetting these days to the low 4s, which is still excellent.