Nation roundup for August 7

McCain, Haley to speak at RNC

WASHINGTON (AP) — A trio of female firsts and three former GOP presidential contenders were among the first speakers disclosed Monday for the Republican National Convention at the end of the month in Tampa, Fla.

The convention schedule is packed with high-profile names to fire up divergent wings of the Republican Party, from social conservatives to fiscal hawks. They will speak before Mitt Romney accepts the presidential nomination.

Convention leaders were not ready to announce the keynote speaker, a prime speaking slot that has the potential to catapult a rising member of the party to national prominence.

South Carolina Gov. Nikki Haley and New Mexico Gov. Susana Martinez, the first female governors of their states, are among party leaders slated to address the gathering that begins Aug. 27.

Martinez has the additional distinction of being the country’s first female Hispanic governor.

Former Secretary of State Condoleezza Rice, the first black female to hold that job, is also scheduled to speak.

Sen. John McCain of Arizona was set to speak, as well as a one-time rival, former Arkansas Gov. Mike Huckabee.

The two, along with Romney, vied for the 2008 presidential nomination. McCain outlasted Romney and the former Baptist pastor in the primary campaign.

Are you happy? Fed chief wonders

WASHINGTON (AP) — Ben Bernanke wants to know if you are happy.

The Federal Reserve chairman said Monday that gauging happiness can be as important for measuring economic progress as determining whether inflation is low or unemployment high.

Economics isn’t just about money and material benefits, Bernanke said. It is also about understanding and promoting “the enhancement of well-being.”

Bernanke and Fed policymakers rely on reports on hiring, consumer spending and other economic data when making high-stakes decisions about the $15 trillion U.S. economy. The Fed’s dual mandate is to maintain low inflation and full employment.

“We should seek better and more-direct measurements of economic well-being,” Bernanke said Monday in a video-taped speech shown to a conference of economists and statisticians in Cambridge, Mass. After all, promoting well-being is “the ultimate objective of our policy decisions.”

Bernanke acknowledged that many people aren’t too happy right now. Unemployment rose in July to 8.3 percent, and economic growth has slowed sharply from the start of the year. He called the recovery “frustratingly slow” when he testified to Congress on July 17.

Aggregate statistics can mask important information about how individual Americans are faring, Bernanke says.

His speech Monday was the latest foray into a relatively new specialty in economics known as “happiness studies.” Bernanke attracted widespread notice when he spoke about the economics of happiness in a May 2010 commencement address at the University of South Carolina.

Knight receives a $400M lifeline

NEW YORK (AP) — Knight Capital Group survived a near-death experience on Monday, lining up Wall Street firms to lend it badly needed cash after the brokerage lost $440 million last week when a malfunction in its trading system flooded the market with erroneous trades.

But the rescue, which came down to the wire, had a steep price: control of the firm. And it’s still not certain that Knight will make it through the episode intact.

Knight’s new investors will gain a 73 percent stake in the company and three board seats. The value of current shareholders’ stake will also be heavily diluted. And Knight, which has removed the problem software and is still completing its own investigation of what went wrong, faces a difficult task of rebuilding trust with clients and persuading regulators that Wednesday’s disaster was an anomaly. Its stock has plunged 70 percent since last Tuesday, before the glitch happened.

“This is an isolated situation,” Knight’s CEO Thomas Joyce said on CNBC Monday morning. “We screwed up. We paid the price.”

All weekend, speculators wondered if Knight would be able to open for business Monday. The technical glitch briefly sent dozens of shares swinging wildly last week and left Knight responsible for many of the stocks that its computers accidentally ordered. The company had to drain its capital to cover the erroneous trades.

The trading disaster Knight caused has revived a thorny debate about how heavily stock trading has come to rely on massive computer systems. Stocks can now be traded in fractions of a second, often by automated programs.

Recent technical problems have eroded shareholders’ confidence that they can trust the system — a point punctuated again Monday, when a technical problem shut down markets in Madrid for five hours.

Early Monday morning, before the stock market opened at 9:30 a.m., it still wasn’t clear whether Knight was OK.

Just after 7 a.m., Knight made a regulatory filing saying it had secured a $400 million lifeline but that the deal wasn’t yet sealed.

An hour later, the New York Stock Exchange threw another twist into the story, announcing it had temporarily reassigned some of Knight’s trading responsibilities to a rival firm.

At 9:22 a.m., Knight announced that the deal was completed, but didn’t say who the investors were. At 9:24 a.m., it did.

Once trading opened, Knight’s stock moved sharply lower in heavy trading. It ended the day down 98 cents, or 24 percent, at $3.07. That’s far below its closing price of $10.33 on Tuesday, the day before the debacle occurred.

Knight Capital is a trading firm that takes orders from big brokers like TD Ameritrade and E-Trade. It then routes them to the exchanges where stocks are traded, like the New York Stock Exchange.

One of the roles Knight plays in the stock market is that of a “designated market maker.” Those firms are responsible for keeping trading of the stocks they oversee orderly. They are viewed as particularly important during the open and close of trading, as well as during times when there is a lot of volatility in the market. Knight is responsible for the trading of 524 NYSE-listed stocks, a sizable chunk of the roughly 2,300 total corporate issuers.

Being on the defensive is a humbling position for Knight, which is considered a respected and top-tier trading firm. That, some observers say, makes its blunder all the more troubling: If it can happen at Knight, it can happen anywhere.

Manoj Narang, CEO of Tradeworx, a high-frequency trading firm, said the market would still function fine without Knight, if it has to.

“Markets are a battleground; it’s survival of the fittest,” Narang said. He compared the activities of Knight and other equity brokerages to driving a car: Sometimes there are accidents, but “that doesn’t mean we should all stop using automobiles.”

A decade ago, CEO Joyce was the architect of another rescue for Knight. That’s when he was brought on to turn around a company mired in losses and sinking revenue. A Merrill Lynch veteran and an athlete during his days at Harvard, Joyce has been praised for being straightforward in his company’s latest crisis.

The CEO, 57, had knee surgery last Tuesday and hobbled back to work the next day to the chaos emanating from the firm he leads. Knight, headquartered across the Hudson River from Wall Street in Jersey City, N.J., was founded in 1995 and has about 1,400 employees across the U.S. and internationally.

Over the weekend, Knight tried, unsuccessfully, to lighten its burden. It asked the Securities and Exchange Commission for an exemption so it wouldn’t have to buy back so many of the mistaken trades, a development first reported by The Wall Street Journal.

The SEC does allow trading firms to cancel some trades made in error, but it has gotten stricter about what qualifies ever since the notorious “flash crash” of May 2010, when another technical problem sent the Dow Jones industrial average plunging nearly 600 points in five minutes.

On CNBC, Joyce said he respected the SEC’s decision but added: “This was an error, by any definition this was an error, so we would have liked to see more flexibility.”

Knight’s cash infusion comes from a group of financial firms led by the Jefferies Group, as well as Blackstone, a big private equity firm; the trading firm Getco; Stephens, Stifel Financial and TD Ameritrade. They’re essentially paying $1.50 per share, a bargain-basement price.

Even with the cash infusion, it’s not yet clear that Knight will regain the trust of other key players in the stock market to carry on and survive as a firm. Some of Knight’s trading partners last week suspended routing trades through Knight, though some have come back.

E-trade on Monday announced it had resumed routing trades through Knight. Online brokerage Ditto Trade said it still wasn’t sending trades through Knight but expected to soon.

When a public company sells such a big portion of itself, as Knight did Monday, it’s usually required to ask shareholders for their permission first. But Knight got an exception after telling the New York Stock Exchange that its financial viability was at stake.

Problems such as the one Knight caused last week have been occurring more regularly as the stock market’s trading systems come under increasing pressure from traders using huge computer systems.

In May the highly anticipated market debut of Facebook was marred when technical problems at the Nasdaq stock exchange delayed the opening of Facebook’s trading and kept many investors from knowing if their trades had gone through. Some were left holding unwanted shares.

In an irony that now dogs Joyce, he was one of the most vocal critics at the time of Nasdaq’s botching of Facebook’s stock market debut.

Best Buy founder offers to buy co, take it private

NEW YORK (AP) — Best Buy’s co-founder is looking to make a buy of his own, offering to take the electronics seller private only months after leaving as the company’s chairman.

Best Buy Co. said it would consider the offer but called it “highly conditional.” And analysts are skeptical that former Chairman Richard Schulze’s opening offer of $24 to $26 per share would get a deal done and that it could be tricky to line up investment firms to help pay for it.

It’s the latest twist in the Minneapolis company’s struggles to stay relevant as more people buy electronics online. Over the past year, it has announced a major restructuring plan and fired CEO Brian Dunn amid allegations that he had an inappropriate relationship with a female employee.

Best Buy is trying to avoid the fate of its rival Circuit City, which went bankrupt in 2009, partly because of changing shopper habits.

The offer values the company at as much as $8.84 billion. Schulze already has 20.1 percent of the stock in the company, so paying for the rest of shares would mean coming up with about $6.9 billion.

Schulze resigned as chairman in May, after Dunn’s departure. A company investigation found that Schulze knew about the inappropriate relationship and failed to alert the board or human resources.

Schulze had been expected to stay on the board until the company’s annual shareholder meeting in June, but he resigned unexpectedly before the meeting and said he was exploring options for his hefty stake in the company. Analysts had been expecting a possible bid since that announcement.

“Immediate and substantial changes are needed for the company to return to its market-leading ways,” Schulze said in a statement. “It is my strong belief that Best Buy’s best chance for renewed success is to implement with urgency the necessary changes as a private company.”

Schulze’s offer would represent a 36 percent to 47 percent premium over the company’s Friday closing stock price.

Schulze said he would have preferred to pursue a deal privately but went public with the offer for the sake of speed.

“I am deeply concerned that further delay and indecision will cause additional loss of both value and talented leaders who are now uncertain of the company’s future,” Schulze said in a statement.

Schulze, 71, opened his first store called the Sound of Music in St. Paul, Minn., in 1966. He expanded the chain to nine stores in Minnesota by 1983 and renamed it Best Buy.

The company revolutionized the electronics business, operating warehouse-style stores and putting all inventory on store floors, rather than keeping it in back rooms. Schulze was CEO for more than 30 years, steering it through decades of steady growth before relinquishing that title in 2002. He remained active on the board and is still the company’s largest shareholder.

In his letter to Best Buy’s board, Schulze said he has a plan to deal with the company’s challenges and has talked with private equity firms about joining in a deal, though he did not specify which firms. Schulze said he would finance the deal through a combination of private equity investments, about $1 billion of his own equity and debt. He said he was working with Credit Suisse to line up financing and that the firm was confident he could find lenders.

Shares of Best Buy rose $2.35, or 13.3 percent, at $19.99 in Monday trading. That kept the stock well below Schulze’s offer, indicating shareholders are skeptical. Analysts also expressed doubt the deal would happen quickly.

“It’s got a lot of obstacles to overcome before we see a final deal consummated,” said Morningstar analyst R.J. Hottovy. He noted that Best Buy’s board has to approve any offer before Schulze can line up private equity financing, as required by Minnesota law, and that is unlikely to happen at the offering price, he said. An offer of $30 would be more appropriate, according to his calculations.

Research firm NBG Productions analyst Brian Sozzi said a deal is possible, but the biggest hiccup will be finding private equity firms to help pay for it. He also thought a higher bid was likely.

“This is going to be a placemaker type bid just to get the ball rolling,” he said.

After the market closed, ratings agency Standard & Poor’s downgraded the company’s credit rating from the lowest investment grade of “BBB-” to a junk-grade “BB+.”

“We believe that Best Buy’s credit profile would weaken materially because such a transaction would add substantial amounts of debt and hinder cash flow protection measures,” S&P said in a statement.

Best Buy has been shrinking store size and focusing on its more-profitable products such as mobile phones. It’s also trying to combat the so-called “showrooming” of its stores — when people browse at Best Buy but purchase electronics goods elsewhere, especially online.

In March, it announced a major restructuring that includes closing 50 stores, cutting 400 corporate jobs and trimming $800 million in costs.

Since Dunn’s departure, interim CEO Mike Mikan has made strong statements about how he plans to restructure the company, focusing on services and revamping stores.

In early July, Best Buy said it would lay off 600 staffers in its Geek Squad technical support division and 1,800 other store workers.