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A summer soap: Backbiting and dirty laundry at Penney’s

Jeff Brown, Special to CNBC.com
Friday, 9 Aug 2013 | 3:13 PM ET
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Recapping the day's news and newsmakers through the lens of CNBC.

Penney's sore lack of leadership

Notes:

How do you wreck a business as fast as possible? Start with lousy results that get your shareholders up in arms. Then flip flop as you grope for remedies. Go leaderless for a while, then descend into a swirl of backbiting—and be sure to air your dirty linen in public.

That's how the drama has unfolded at once-highly regarded J.C. Penney. In the latest installment, activist investor and independent director Bill Ackman today demanded the board meet as soon as possible and replace chairman Tom Engibous. Ackman, whose Pershing Square Capital Management is one of the retailer's biggest shareholders, says the board is taking too long to name a permanent CEO, leaving Penney's rudderless.

Ackman's voluminous letter unloads a string of peeves centering on the complaint that he and his team have not been kept in the loop and consulted on key decisions.

Others say Ackman himself has become a big part of the company's problem, responsible for creating a public display that has driven the stock down. And one analyst said the dispute over finding a CEO could make a CEO even harder to find.

Quotes:

"What you have is an angry guy going through his temper tantrums. We've seen how [Ackman] can inspire the ire of Carl Icahn and get into a mud throwing spat…akin to Rosie O'Donnell and The Donald. He's capable of the same kinds of things when he's on a board of directors. It's sort of a frat boy affect."
—Jeff Sonnenfeld, Yale School of Management

"Sounds like a great working environment that will surely tempt a quality CEO."
—Stacey Widlitz, president of SW Retail Advisors

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Home-buying traffic slows but could pick up again

Notes:

Higher mortgage rates hurt home sales and prices.

This principle has begun to assert itself. The jump in mortgage rates from May to June is starting to hinder the housing recovery. A Credit Suisse survey finds that buyers, who initially rushed to lock in deals as they saw rates rise, have now pulled back to see what will happen next.

Real estate agents polled noted a drop in buyer traffic in July, the first time since December that traffic didn't surpass expectations. Of course, buyers may conclude that today's rates, around 4.5 percent for 30-year fixed loans, are still pretty good, and better than they'll get in six months or a year. So it's too soon to say the housing recovery is over.

Quotes:

"We saw an increasing number of comments suggesting the sharp rise in mortgage rates has led to a pause in demand, with many agents saying the initial urgency they saw from buyers as rates moved higher has subsided and now buyers are stepping back to re-evaluate their options."
—Analysts at Credit Suisse

"[Higher rates] put people that are on the fringes ... out from qualifying. For those that already did qualify, it's psychological. All of a sudden that house that was going to cost you X is now costing you another $100 a month in mortgage payments, and that does make a difference."
—Craig Strent, CEO of Apex Home Loans

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U.S. popularity is on the rise, but not everywhere

Notes:

What's it worth to be popular? It's hard to put a number on it, but any salesman knows that being liked is money in the bank. That holds true for countries as well as individuals, and there's some good news for America. A poll by the Pew Research Center finds that pro-American sentiments around the world have recovered to the pre-Iraq war level of 2002.

In the 28 nations surveyed, 64 percent of people held favorable views of the U.S., up 13 points since 2007. As you'd expect, good will is not universal. The U.S. is decidedly unpopular in Pakistan, where only 11 percent like us, and Jordan, where the figure is a dismal 14 percent. Our biggest fans are in Ghana, 83 percent, and South Korea, 78 percent.

Quotes:

"During the [George W.] Bush era, the Iraq War was very unpopular in many parts of the world and that drove down ratings of the U.S. President [Barack] Obama, for the most part, his policies have been viewed more favorably in many parts of the world. That's helped American image."
—Richard Wike, associate director of the Global Attitudes Project at Pew Research Center.

"Arab perceptions of America are not based on what America is doing today. They are more based on a deep assessment that is decades long, that sees America as a materialist power acting in the Middle East principally for two reasons: to support Israel and control oil."
—Shibley Telhami, political scientist at the University of Maryland

David Karp, founder of the micro-blogging site Tumblr, opens the NASCAQ Exchange in New York City.
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David Karp, founder of the micro-blogging site Tumblr, opens the NASCAQ Exchange in New York City.

How much it costs to keep a cool, young CEO on the job

Notes:

One fear associated with Yahoo's acquisition of Tumblr is being able to keep the cool kids who use the service around once it's owned by one of the tech sector's old guard. But how about keeping Tumblr's CEO around for a while? That will add a little more to the $1.1 billion Yahoo already paid for the company.

A regulatory filing revealed that an $81 million payment to Tumblr founder David Karp is due as long as he remains on the job for the next four years. The payment is to be split between $41 million in stock and $40 million in cash.

Quotes:

"It's amazing how well the business has done since Marissa Mayer got there. ... I think that what will happen is that advertising revenue will follow the gains in traffic."
Michael Wolf, former Yahoo board member

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The inconvenient truth about Fannie and Freddie

Notes:

When it comes to winding down Fannie Mae and Freddie Mac, easier said than done.

A key problem is who will be first in line to suffer losses when borrowers default. Essentially, that's the role played by Fannie and Freddie. Their backing relieves lenders of major risks, allowing them to set mortgage rates lower than they would otherwise.

A Senate bill that's generally in line with President Obama's view would require private insurers to take the initial losses, with deeper losses handled by a new government insurer.

But Peter Wallison of the American Enterprise Institute worries that approach would be open to political interference, since it would lead to higher mortgage rates, which many constituencies would oppose. And Yves Smith, a blogger for Naked Capitalism, doubts the insurers would be able to find enough investors willing to take that first risk. This was one of the key problems in the subprime mortgage market of the early and mid-2000s, she says.

Quotes:

"The private bond insurer or other risk-sharer will understand the downside potential of low-quality loans and will charge for the additional risk. That cost will be incorporated into the mortgage. ... Congress or the administration or both will pressure the [government insurer] to lower its insurance fees so that the maximum number of people will be able to buy homes."
—Peter Wallison of the American Enterprise Institute

"Here's the dirty secret: there was never enough of a market for that stuff.... the sub-prime market was ultimately a Ponzi scheme."
—Yves Smith, Naked Capitalism

—By Jeff Brown, Special to CNBC.com

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