MONEY Federal Reserve

Fed Leaves Rates Unchanged, Signals Cautious Stance

Janet Yellen
Federal Reserve Bank Board Chairman Janet Yellen Chip Somodevilla—Getty Images

The Federal Reserve kept interest rates near zero -- and surprised many by not hinting at higher rates.

The Federal Reserve’s Open Markets Committee left interest rates unchanged Wednesday. But in a minor surprise, the central bank declined the opportunity to drop a widely expected hint that it was inching closer to raising rates.

Many on Wall Street and in the financial media had expected the central bank, which wrapped up a two-day meeting in Washington on Wednesday, to prepare markets for higher rates by changing the language of its closely watched economic statement.

The Fed had previously and repeatedly reassured investors that rates would remain low for “a considerable time.” With the U.S. economy steadily improving, many economists expected the phrase to be dropped. But it reappeared in Wednesday’s release.

The Fed’s language did change ever so slightly. The committee, it said, “judges that it can be patient in beginning to normalize the stance of monetary policy.” But it went on to add that it viewed this new assessment as “consistent” with its previous reassurances that the hike would come after a “considerable time.”

The tweaks to the Federal Reserve’s assessment come at a time when the U.S. economy is finally showing signs of sustained strength, with robust third-quarter GDP growth of 3.9% and a November jobs report that was widely regarded as one of the best in months.

But the Fed may have found reason for caution in the stock market’s recent skittishness. Prompted by plunging oil prices and a brewing crisis in Russia, shares have fallen about 5% since December 5. Investors appeared to react positively to the announcement. The Dow had already rallied about 150 points early Wednesday afternoon as news broke that the U.S. planned to normalize relations with Cuba. Immediately following the Fed’s announcement, the Dow was at 17,340, up about 272 points.

 

 

 

 

TIME Investing

This New App Makes It Way Cheaper to Trade Stocks

Robinhood
Robinhood Robinhood

Robinhood wants to convince Millennials to dip a toe into the stock market

Next up for disruption by the Silicon Valley set: Wall Street.

A new startup is aiming to convince Millennials to dip a toe into the stock market by making it cheaper and easier to buy securities. Robinhood, a new mobile-first brokerage that launched its iOS app today, lets users buy U.S.-listed stocks without paying a commission, a cost that typically runs individual investors $7 to $10 per trade.

The app’s slick interface lets users buy securities, track stock performance and keep tabs on their overall portfolio. Users don’t even have to maintain a minimum account balance, a common requirement of similar stock-swapping services.

“People in our age group were not being exposed to what we consider a pretty useful tool for building your wealth,” says Robinhood co-founder Vlad Tenev. He and co-founder Baiju Bhatt launched Robinhood in beta for a few thousand users earlier this year. Already half a million people have signed up to request the app, indicating a heavy appetite for cheaper trades. These users will begin being on-boarded to the app today, and newcomers can download the app to join the waitlist and view different stocks.

The company, which has netted $16 million in venture funding from backers like Andreessen Horowitz and Google Ventures, plans to make money by letting investors trade on margin (basically issuing loans to let customers buy additional stock).

Whether or not young investors really need a service that lets them buy stocks “as quickly as you can call an Uber,” as Bhatt puts it, is an open question. Most active stock pickers fail to outperform the overall stock market. During the first 9 months of 2014, only 9.3% of actively managed mutual funds outperformed the S&P 500, according to the Wall Street Journal — and those funds are managed by people whose job is to be good at picking stocks.

Tenev argues that stock-picking is a good way for young people to learn about investing. “It makes a lot of sense for a first-time investor who is an early adopter of technology and discovers companies through using their products and services,” he says.

That advice flies in the face of a lot of collective wisdom about investing, including from famed businessman Warren Buffet. But for those that are still confident they can beat the market and would like to attempt it more affordably, Robinhood will also be available on Android and on desktop soon.

TIME Money

Millennials Will Make These 15 Companies Tons of Money

Bags of tortilla chips sit in a row at a Chipotle Mexican Grill Inc. restaurant in Hollywood, California on July 16, 2013.
Bags of tortilla chips sit in a row at a Chipotle Mexican Grill Inc. restaurant in Hollywood, California on July 16, 2013. Patrick T. Fallon—Bloomberg / Getty Images

Where Millennials choose to spend their money could pay off serious dividends

The question on every Wall Street trader’s mind these days: “What do millennials like?”

Or at least it should be, according to a new report released Tuesday by Morgan Stanley’s equity strategy team. The report paints a pretty compelling picture of the millennial generation’s spending power five years out.

First, in terms of sheer size, millennials outnumber baby boomers as the largest demographic group. But more importantly, they are aging into some of the spend-happiest years of their lives. In the average lifecycle of the American shopper, spending tends to spike between the ages of 25 and 39:

Screen Shot 2014-11-18 at 3.54.45 PM
Morgan Stanley Research

 

Where they choose to spend that money could pay serious dividends to a few savvy stock pickers. Which brings us back to the question, “What do millennials like?”

“Fast casual dining, hotels, buying online, gaming (social and online, less so casinos), eating organic and healthy, and working out more,” writes Morgan Stanley’s consumer stock researchers. They winnowed down a shortlist of 15 companies that hit those millennial sweet spots, and presented them as a “millennial basket” for investors’ consideration before the flood:

Screen Shot 2014-11-18 at 3.52.44 PM
Morgan Stanley Research

 

 

 

 

MONEY Markets

Are the Media to Blame for Financial Bubbles?

Ritholtz Wealth Management CEO Josh Brown, a.k.a. the Reformed Broker, explains the relationship between media coverage and financial bubbles.

MONEY

Why Does a Hedge Fund Care About Breadsticks? This Video Explains

An "activist" fund just took over the board of the company that runs Olive Garden and wants to change the menu. Another investor is telling Apple what do with its cash. Who are these guys?

TIME financial regulation

The Real Silver Lining of the Absurd AIG Lawsuit

Former U.S. Federal Reserve Chairman Ben Bernanke.
Former Federal Reserve chair Ben Bernanke. Jonathan Ernst—Reuters

It's ludicrous that shareholders are suing the government over their losses, but at least it's a reminder that Wall Street financiers did take losses.

Have I mentioned how outrageous it is that AIG shareholders are suing the government over the AIG bailout that prevented them from total wipeout? Have I compared them to homeowners suing the fire department for getting their furniture wet while saving their home? Have I mocked the bailout critics who admit this lawsuit is “asinine” and “mostly insane” but still claim it’s performing a public service?

Oh, I have? Just last week?

Well, this week, the critics will get their wish, as the architects of the Wall Street bailouts—Hank Paulson, Tim Geithner and Ben Bernanke—are scheduled to testify in this frivolous lawsuit. So this is a good time to concede there actually is a silver lining to this cloud of absurd litigiousness. But it definitely isn’t what the critics think it is. It’s that the AIG lawsuit, while breaking new ground in chutzpah, might help remind Americans that even though government rescued some Wall Street firms, the financial crisis still cost a lot of Wall Street investors a lot of money. The financial sector emerged way better than it would have without government help, and it’s certainly thriving today, but financiers didn’t all emerge unscathed.

The critics have applauded the lawsuit for a very different reason. They expect this week’s testimony to reveal The Truth about AIG, which will surely involve Geithner and Goldman Sachs conspiring with Colonel Mustard to destroy Main Street while bwahahaha-ing all the way to the bank. In fact, the truth about the AIG bailout is already out there. It was infuriating, because bailouts are always infuriating, but it was necessary and ultimately successful. After insuring toxic mortgage assets for every major global financial institution, AIG was dead in the water in September 2008, and its failure in the wake of the Lehman Brothers collapse could have shredded the global financial system. Not only did the $182 billion AIG bailout save the firm, it saved the system. And U.S. taxpayers eventually recouped their entire investment in AIG, plus a cool $22.7 billion in profit.

The bailout helped AIG shareholders, too. Their equity was worth something instead of nothing. Former AIG chief executive Hank Greenberg, the lead plaintiff in the lawsuit, unloaded $278 million worth of company stock in 2010; it presumably would have been worth nothing if the government had let the firm declare bankruptcy and the global economy implode. Greenberg’s complaint that the government unconstitutionally seized his property—and that AIG was entitled to the same bailout terms as much less troubled banks that posed much less of a threat to global financial stability—should have been laughed out of court.

That said, it’s important to recognize that while AIG’s shareholders didn’t lose everything, they lost an unimaginable amount of money. AIG stock plummeted from a high above $150 a share to less than $5 the day of the bailout. The government then took over 79.9 percent of the company, further diluting the value of each share. And when AIG needed more help, there was even more dilution. In his memoir, Stress Test, Geithner recalls how at a time when the country wanted his head for being too gentle with AIG, Greenberg visited him to complain that the Fed had been overly harsh by taking so much equity in AIG. “I told him we hadn’t done the deal to make money, and we’d be happy to sell him back some of the equity if he’d be willing to take some of the risk,” Geithner recalled. Greenberg wasn’t willing, so taxpayers rather than shareholders enjoyed most of the upside of AIG’s recovery.

I helped Geithner with Stress Test, so I’m biased, but I think Greenberg’s pique is silly; there wouldn’t have been any upside for anyone if the government hadn’t stabilized AIG and the rest of the system. At the same time, I think the terms of the AIG bailout were legitimately tough on investors who made bad bets on a reckless firm. They were certainly tougher than the terms of the broader Wall Street bailout known as TARP—and some bankers complained bitterly about TARP’s terms, which were intended to be (and were) tough enough to encourage banks to pay them back as quickly as possible. All of the bailouts were designed to balance the need to quell the panic in the markets and pave the way for economic recovery with the need to protect taxpayers. They ultimately did both.

The larger point, so often missed in the post-crisis too-big-to-fail debate, is that the lavish Wall Street bailouts did not shield all of Wall Street from pain. Critics of the bailouts often say they sent a message that you could invest in Wall Street behemoths without risk, that government would cover all your losses when markets turned sour. It’s amazing this even needs to be said, six years after a financial shock five times as large as the shock that preceded the Great Depression, but that’s simply wrong. Some of the jerks in suits took baths. Main Street bore the brunt of the pain, and that’s not fair, but there was plenty of pain on Wall Street, too.

Lehman Brothers disappeared; its shareholders were wiped out, and its executives all lost their jobs. Investors in Bear Stearns, Fannie Mae, Freddie Mac, Countrywide, Washington Mutual, Wachovia, Citigroup, Bank of America, GMAC, and other firms that got sucked into the crisis took baths, too. Very few of the big Wall Street CEO’s kept their jobs after the bubble burst, although some were fortunate enough to cash out their stock before the house of cards toppled completely. Some savvy investors have taken advantage of the misfortunes of others; David Tepper, a hedge fund manager, made billions by buying bank stocks after the market hit bottom in March 2009, essentially betting on the success of the government rescue plans. But markets always have winners and losers; the bailouts did help some of the losers limit their losses, but they didn’t change that essential capitalist truth.

The even larger point, which should also be clear but most definitely isn’t, is that the Wall Street bailouts were not designed to enrich Wall Street. They were designed to protect Main Street from a Wall Street cataclysm. The goal was to prevent enough financial failure to stem the panic and lay the groundwork for recovery. The goal was achieved. Main Street was losing 800,000 jobs a month during the panic; now it’s gaining more than 200,000 jobs a month. Yes, Wall Street has enjoyed an even healthier recovery. But punishing Wall Street during the panic would not have made things better for Main Street now; it would have accelerated the panic, which would have been devastating for Main Street.

So we should mock the gall of the litigants who are suing the fire department that saved their homes. Still, we can recognize that some of their furniture got wet.

 

 

 

TIME Economy

We Still Haven’t Dealt With the Financial Crisis

Five Years After Start Of Financial Crisis, Wall Street Continues To Hum
A street sign for Wall Street hangs outside the New York Stock Exchange on September 16, 2013 in New York City. John Moore—Getty Images

It often takes years after a geopolitical or economic crisis to come up with the proper narrative for what happened. So it’s no surprised that six years on from the financial crisis of 2008, you are seeing a spate of new battles over what exactly happened. From the new information about whether the government could have, in fact, saved Lehman Brothers from collapse, to the lawsuit over whether AIG should have to pay hefty fees for its bailout (and whether the government should have penalized a wider range of firms), to the secret Fed tapes that show just how in bed with Wall Street regulators still are (the topic of my column this week), it seems every day brings a debate over what happened in 2008 and whether we’ve fix it.

My answer, of course, is that we haven’t. To hear more on that, check out my debate on the topic with New York Times’ columnist Joe Nocera, on this week’s episode of WNYC’s Money Talking:

TIME

The Real Truth About the Wall Street Bailouts

It happens to be the one we already know

It was probably inevitable, which doesn’t make it any less absurd. And it is certainly a reflection of their remarkable success, which doesn’t make it any less unfair. But six years after the spectacularly unpopular Wall Street bailouts, the government rescuers are under fire again—this time, not for their alleged generosity to financial firms, but for their alleged stinginess.

On Monday, a trial began in a lawsuit filed by AIG shareholders who claim the government somehow violated their rights when it rescued the busted insurer and salvaged their worthless investments. But even commentators who have admitted the lawsuit is “asinine” (in the New York Times) and “mostly insane” (in The New Republic) have suggested it’s nonetheless performing a public service, because it’s going to reveal the truth about the Wall Street bailouts. And on Tuesday, the Times ran a blockbuster story quoting unnamed sources who claim the government also could have bailed out Lehman Brothers, the venerable investment bank whose implosion nearly cratered the global economy. Again, the implication is that the official story is askew.

In fact, the lawsuit over the $182 billion AIG bailout is precisely as asinine and insane as it sounds. The government officials who stabilized the world’s most dangerous financial firm were the ones who performed a public service. And they absolutely would have rescued Lehman as well if they could have. Unfortunately, Lehman was hopelessly insolvent, and the government had no legal or practical way to save it without a private buyer willing to take on at least some of its risks. As for the truth about the Wall Street bailouts, well, the truth is already out there.

I have a bias here; I helped former Treasury Secretary Tim Geithner, who helped rescue AIG and tried to rescue Lehman when he was president of the New York Fed, with his memoir, Stress Test. I was even peripherally involved in the AIG case, when Greenberg’s lawyers sought access to transcripts of my conversations with Geithner.

But I wrote a pretty high-octane defense of the AIG bailout back in January 2010, before I ever met Geithner. And it stands up pretty well, except for the part where I said taxpayers would take a hit; in fact, taxpayers ended up earning a $22.7 billion profit on their investment in AIG.

Overall, taxpayers have made more than $100 billion on the bailouts. More importantly, the aggressive U.S. financial response—along with similarly aggressive monetary and (initially) fiscal policies—helped rescue a free-falling economy that was crashing at an 8 percent annual rate. We’ve recovered better than the rest of the developed world—Europe still has 11 percent unemployment—and much better than nations that endured much less damaging financial crises in the past. It’s kind of amazing that we’re still arguing about an emergency response that turned out so much better than anyone, even the emergency responders, expected at the time.

But here we are. Critics still doubt the official story that Lehman could not be saved. They also insist the Fed could have forced AIG’s senior creditors to accept less than 100 cents on the dollar; they’re excited about the lawsuit because they expect it to expose shocking evidence about why the government didn’t insist on haircuts. In fact, these questions have been asked and answered. Geithner tells the story of Lehman and AIG at length in Stress Test. You can find a quick explanation of why Lehman couldn’t be rescued in on pages 206-208 and a quick summary of why AIG’s counterparties didn’t absorb haircuts on pages 246-248. Again, I’m biased, but if you’re interested in this stuff, you should read the whole thing.

Here’s a shorter version. The old conventional wisdom that Geithner and his colleagues were desperate to prevent big Wall Street firms from collapsing during the crisis was basically correct, although I’d say they were right to be desperate. The firms were all dangerously interconnected with the rest of the global financial system at a time when markets had lost confidence in their housing-related assets, and it was clear that any one of them defaulting on its obligations could further depress confidence and spark runs on the others. That’s why when Bear Stearns was failing in March 2008, the Fed helped engineer a deal for JP Morgan Chase to acquire it and stand behind its obligations, providing an emergency loan backed by some of Bear’s sketchiest mortgage securities. And when Lehman was failing that September, Geithner and his colleagues worked feverishly to recruit a buyer for a similar deal, holding a series of emergency meetings documented in crisis books like Too Big to Fail and In Fed We Trust.

So what happened? The only bank willing to buy Lehman and its toxic assets that chaotic weekend was the British firm Barclays—and British regulators balked before a deal could be finalized. That left the Fed without options. It’s only allowed to lend against plausibly solid collateral, and Lehman looked hopelessly insolvent. At the time, then-Fed chair Ben Bernanke and then-Treasury Secretary Hank Paulson suggested publicly that they had chosen to let Lehman fail, because they didn’t want to accelerate the panic by making the government appear powerless. But really, they had been powerless. They knew the consequences of failure would be disastrous. They would have been thrilled to find a way to save Lehman.

In its carefully hedged, anonymously sourced story, the Times is now suggesting some New York Fed officials were “leaning toward the opposite conclusion—that Lehman was narrowly solvent and therefore might qualify for a bailout.” Put it this way: Their bosses did not agree, and neither did the market; as the Times noted, Bank of America had estimated Lehman’s net worth at about negative $66 billion that weekend. In fact, a subsequent study by economists William R. Cline and Joseph E. Gagnon—a study not mentioned by the Times—found that Lehman was at least $100 billion and perhaps $200 billion in the hole at the time.

“Our overall judgment on Lehman is that it was deeply insolvent,” Cline and Gagnon concluded.

One more point about Lehman: Even if the Fed had broken the law to lend into a run on an insolvent firm, and had somehow managed to stabilize Lehman rather than kiss its cash goodbye, it wouldn’t have defused the larger crisis. The government still lacked the authority to inject massive amounts of capital into the financial system—and a Congress that initially refused to grant that authority through the notorious TARP even after Lehman’s failure certainly wouldn’t have granted it before a failure of similar magnitude. Whatever. I guess some people find it comforting to believe the government could have snapped its fingers and ended the crisis early. It’s not a reality-based belief.

The perennial question is how, if the Fed lacked authority to rescue Lehman, it somehow found the authority to rescue AIG the next day. The short answer is that AIG, despite the awful misjudgments of a subsidiary that insured trillions of dollars worth of mortgage securities, had valuable revenue-generating businesses and a plausible claim to solvency. While Lehman was really nothing more than the sum of its toxic assets and shattered reputation as a venerable brokerage, AIG had solid collateral that the Fed could lend against with a decent expectation of repayment.

Ultimately, AIG would receive an astonishing $182 billion in government financing, and it would pay back every dime with interest. Its shareholders, who would have received nothing if the government had let the firm collapse, are now complaining in court that they should have gotten more. In his Times op-ed, Noam Scheiber aptly compared them to “a formerly starving man insisting he deserved filet mignon rather than a rib-eye.” Yet Scheiber argued that their filet mignon demand “may end up serving a constructive purpose.” He thinks the trial underway in Washington will reveal the real reason AIG’s creditors didn’t face haircuts; he doesn’t think the official explanation—that voluntary haircuts were impossible, and involuntary haircuts would have accelerated the panic—makes any sense. Times columnist Gretchen Morgenson not only called the lawsuit a “public service,” she actually portrayed AIG as an innocent victim in the financial crisis, “the patsy at the poker table.”

Uh…no. AIG was as rapacious and reckless as any bank. The government did push for modest haircuts for its creditors that might have saved taxpayers as much as $1 billion, but seven of the eight top creditors flatly refused. Unfortunately, the Fed could not force them to change their minds; several of them weren’t even U.S. firms. And the Fed could not impose the haircuts without forcing AIG into default; the creditors logically concluded a government that was spending $182 billion to avoid a default wasn’t going to create a default on purpose to save $1 billion.

This is the key: In a financial crisis, default is the enemy. The fear that secured debts won’t be repaid in full is the fear that drives panics. The Federal Deposit Insurance Corporation learned this the hard way a week later when it foolishly haircut Washington Mutual’s creditors, instantly triggering a run on the next-weakest bank, Wachovia; its ten-year bonds lost two thirds of their value the day after the haircuts. The whole point of the bailouts was to avoid defaults. This is not “counterintuitive” (Scheiber’s word) to anyone who has endured a financial crisis.

But the critics—who were wrong when they predicted the bailouts would cost trillions, and when they warned that the banking system could not be saved without mass nationalization, and in so many other ways—think the frivolous AIG lawsuit will reveal some dirty backroom deal where Geithner and Lord Voldemort conspired to rip off widows and orphans on behalf of Goldman Sachs. “Traumatic historical episodes often require a high-profile public reckoning before the country can move on,” Scheiber wrote. OK, he then admitted, the financial crisis inspired a litany of those, “but none fully exposed the weakness of Mr. Geithner’s logic.”

Hmm. Maybe it’s someone else’s logic that’s weak. And maybe it’s already time for the country to move on.

MONEY wall street

Burger King Wants to Cut its Exposure to Hamburgers, Not Just Taxes

While all the focus is on the tax savings Burger King could enjoy through a Canadian inversion, the real benefit of buying Tim Hortons is boosting breakfast and coffee sales.

The initial media reaction is that Burger King is turning its back on America by reportedly seeking to buy the Canadian coffee-and-doughnut chain Tim Hortons. After all, it can move its headquarters to Ontario to pay less in taxes.

In reality, Burger King may be more interested in turning its back on the hamburger.

The $11 billion burger chain is in talks to buy Tim Hortons , Canada’s biggest fast-food chain with a market value of around $10 billion. The deal would reportedly involve a so-called inversion, where Florida-based Burger King would for tax purposes be headquartered in Canada, where the top corporate tax rate is 15%, versus 35% in the U.S.

But as The New York Times pointed out, Burger King’s tax rate is actually closer to 27%, and this inversion really wouldn’t cut its taxes that much because the majority of its revenues are generated in the U.S. Even if it moved to Canada, BK would still be on the hook for U.S. taxes on sales made on American soil.

No, there’s something else driving this deal, and it could be that Burger King wants to abdicate its rule over burgers and switch kingdoms.

As Americans’ tastes have changed, burger sales, which have long dominated the fast-food landscape, have started to stall. Last year, for instance, revenues at Burger King restaurants in the U.S. that have been open for at least a year fell 0.9%, while U.S. same-store sales at McDonald’s slumped 0.2%. By comparison, Starbucks STARBUCKS CORP. SBUX -0.7372% reported an 8% rise in comparable store sales in fiscal 2013 while Dunkin’ Brands DUNKIN BRANDS GROUP DNKN -3.2056% , the parent company of Dunkin’ Donuts, enjoyed a 3.4% rise in revenues.

This isn’t just a short-term problem. Analysts at Janney Montgomery Scott recently noted that while three of the five biggest fast-food chains in the U.S. are still hamburger joints (McDonald’s, Wendy’s, and Burger King), by 2020 that number should drop to just one: McDonald’s.

Meanwhile, coffee chains Starbucks and Dunkin’ Donuts are expected to move up the ranks. And McDonald’s is itself doubling down on coffee, pushing more java not just in its restaurants but also on supermarket shelves.

Noticing a common theme here?

In the fast food realm, there are three buzzy trends right now. There’s the rise of the higher-end “fast-casual” restaurants such as Chipotle Mexican GrillCHIPOTLE MEXICAN GRILL INC. CMG -0.6376% . There’s the explosion of cafe coffee shops, which according to the consulting firm Technomic was the fastest-growing part of the fast-food industry last year, with growth of 9%.

Darren Tristano, executive vice president at Technomic, recently noted that “the segment continues to be the high-growth industry leader with Dunkin’ Donuts and Tim Hortons rapidly expanding.”

He added:

[The] coffee-café segment competition will heat up, and new national chain, regional chain and independent units will increase major market penetration. Smaller rural and suburban markets will be getting more attention. Fast-casual brands in the bakery-café segment like Panera Bread, Einstein Bros. Bagels and Corner Bakery will also create new options for consumers as more locations open. Quick-service brands like McDonald’s will provide lower-priced, drive-thru convenience that provide value-seekers with a strong level of quality that is also affordable.

And the third area of growth in fast food is breakfast. According to The NPD Group, while total “quick serve” restaurant traffic fell by 1% at lunch and dinner time in 2013, business at breakfast time rose 3%.

“Breakfast continues to be a bright spot for the restaurant industry as evidenced by the number of chains expanding their breakfast offerings and times,” says Bonnie Riggs, NPD’s restaurant industry analyst.

Now, while Burger King isn’t really positioned to go after the Chipotles of the world, the acquisition of Tim Hortons could quickly make it a bigger player in the coffee and breakfast markets, where it has languished far behind McDonald’s and Dunkin’ Donuts.

Tim Horton’s already controls 75% of the Canadian market for caffeinated beverages sold at fast-food restaurants, according to Morningstar, and more than half the foot traffic at the key morning rush hour.

Morningstar analyst R.J. Hottovy noted recently that same-store sales throughout the chain are expected to rise 3-4% over the next decade, which would be a marked improvement over the same-store declines that Burger King has been witnessing lately.

Even though Burger King is a bigger company by market capitalization, it generates less than half the $3 billion in annual revenues that Tim Hortons does. This means that by buying the Canadian chain, Burger King will be able to buy the type of same-store growth that it could not muster with hamburgers and fries.

So the next time you go to Burger King, don’t be surprised if they ask you “would like some coffee to go with that?”

SLIDESHOW: Burger King’s Worldwide Journey To Canada

 

 

MONEY Banking

2 Reasons to Chill Out About Huge Bank Profits—And 1 Reason to Get Angry

JP Morgan Chase, New York, NY
Mike Segar—Reuters

Little more than five years after the darkest point of the Great Recession, banks are again making record profits. Has the world no justice?

On Monday, the Wall Street Journal reported that banks earned more than $40.24 billion in the second quarter, the industry’s second highest quarterly profit in roughly a generation, just behind the $40.36 billion banks earned in early 2013. That may be infuriating to millions of Americans who lost their jobs and maybe even their homes in a recession due in no small part to Wall Street missteps, if not outright malfeasance.

But there are some reasons to take big bank profits in stride…even if they remain a long-term concern.

Other industries are also raking it in.

Record bank profits are making headlines. But that’s because Americans have developed such a disdain for bankers, not because bank profits are particularly extraordinary. In fact, corporate profits, which hit a record $1.7 trillion last year, are higher across the board.

Banks have certainly enjoyed their share of the pie. According to S&P Dow Jones Indices, financial services companies grabbed about 20.3% of all the profits posted by companies in the S&P 500 last quarter. At first blush a fifth of earnings may seem high. Indeed, financial services firms are the most profitable industry that S&P tracks, slightly ahead of technology, which contributes about 17.5% of S&P 500 profits. And unlike tech whizzes whose gadgets improve our lives, bankers don’t “make” anything.

But in the years leading up to the financial crisis, financial services accounted for a much bigger share of profits–at times more than 30%. In fact, today’s level is essentially in line with banks’ 20-year average of 20.2% of profits.

They’re making money on lending, not trading.

The other reason to feel relatively good about rising bank profits has to do with how banks are making that money. Monday’s Journal story emphasized that the jump in bank profits was tied to increased lending levels; commercial lending rose at an annualized 13% rate, while consumer lending climbed 6%.

That’s good news because lending is what we – even those among us who resent bankers – want banks to do. Lending helps businesses grow and helps consumers buy stuff, both of which ultimately help the overall economy. In fact the anti-banking crowd has been complaining that banks haven’t been doing enough lending. So they should take heart that that’s starting to change, even if it means banks are earning enviable profits in the process.

At the same time, the growth in lending contrasts with a still-tepid climate for another traditional profit line: trading. Placing bets–often with borrowed money–on different corners of the stock and bond markets was a huge profit engine for banks in the days before the financial crisis. But it made them riskier, and arguably had much less value for society than lending money directly to businesses. While the second quarter may have been good to banks overall, trading revenue at Wall Street’s biggest firms—Goldman Sachs Group Inc. THE GOLDMAN SACHS GROUP INC. GS 0.8716% , JPMorgan Chase & Co. JPMORGAN CHASE & CO. JPM 0.7319% , and Citigroup Inc. CITIGROUP INC. C -0.1664% —fell 14%, according to Bloomberg, which called the result “the worst start to a year since the 2008 financial crisis.”

The trend has a lot to do with calm stock and bond markets. But don’t count out the effect of new regulations like the Volcker rule.

But lessons have not been learned.

Of course, even with some big caveats it can still seem pretty galling that an industry that received billions in government bailouts less than a decade ago is so wildly profitable, if not quite as wildly profitable as it once was. You may be even more irritated when you consider that banks achieved these profits despite paying more than $60 billion in settlements and penalties since the 2008, which suggests they ought to have been asked to pay even more for their contribution to the crisis. And that Wall Street pay has bounced back almost as quickly as profits.

Then there’s the disturbing fact that the “living wills” submitted by the country’s largest banks—blueprints for safely winding down their activities in the event of another financial crisis—were just last week deemed inadequate by the Federal Reserve and the Federal Deposit Insurance Corporation. In other words, the banks are still “too big to fail,” so taxpayers could again be left holding the bag if the animal spirits get out of control again—and record profits have a tendency to make that happen.

Ultimately, the return to business as usual may, as Fortune recently suggested, give more ammunition to those in Washington who are still calling for stricter banking rules. But given the strength of the business lobby in Washington, don’t expect any miracles.

 

 

 

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