D2 Tuesday, April 19, 2011 • THE BULLETIN
C OV ER S T OR I ES
Myspace founder starts over Foreclosure probe talks with online gaming company yield some agreements By David McLaughlin By Evelyn M. Rusli
New York Times News Service
NEW YORK — Attorneys general negotiating a settlement of a 50-state investigation of foreclosure practices have reached agreements with lenders on some terms while failing so far to reach an accord on potential monetary payments by the banks, said a person familiar with the talks. The probe was triggered by claims of faulty foreclosure practices following the housing collapse which law enforcement officials said may violate state law. Significant progress has been made on a deal with lenders, which include Bank of America and JPMorgan Chase, with agreements in principle reached on several issues, said the person, who didn’t specify the areas of accord as they may change as talks proceed. It may take at least two months to reach a final agreement, said the person, who declined to be identified because the talks are private. An accord remains out of reach because states want principal reductions for borrowers, which is more than banks agreed to in deals reached with
Just days after the online gaming company MindJolt moved into its Los Angeles headquarters in March 2010, rain started to pour through the ceiling. Christopher DeWolfe, the chief executive, and his small team of engineers frantically grabbed towels and buckets to protect the computers. “When you’re working with a big company, you’re used to having a facilities manager and assistant,” said DeWolfe, who bought MindJolt in March with the help of the venture capital firm Austin Ventures. “It reminded me that you have to dig in and you have to do a lot of work yourself.” DeWolfe, 45, is a long way from his days at Myspace, the once-dominant social network that he co-founded and later left abruptly in 2009, a few years after it was bought by News Corp. Instead of a plush executive suite with a view of the Beverly Hills sign, he now sits two miles away, in a bare-bones office facing a parking lot. He has also traded the challenges of a fallen social network giant for a small upstart at the beginning of its life. While Myspace continues to lose money, MindJolt, a profitable enterprise with more than $20 million in revenue and 20 million monthly users, continues to expand its base. In the latest sign of its ambitions, MindJolt acquired two gaming companies last week, Social Gaming Network and Hallpass Media — effectively doubling its staff to 80 and adding mobile games to its stable of Web offerings. And more acquisitions will come, says DeWolfe, who is considered to be one of the many bidders weighing a purchase of Myspace, according to one person close to the deal, who asked not to be named because talks are private. News Corp. ousted DeWolfe as the chief executive of Myspace in 2009, as revenue fell and Facebook rose. While Myspace was losing momentum when he left, it still had more unique visitors in the United States than Facebook. In 2008, the Fox Interactive division, largely Myspace, posted
Outlook Continued from D1 The yield was back down to 3.37 percent at 4:27 p.m. as investors focused on speculation that Greece will be unable to avoid a default, driving them to the relative safety of U.S. debt. The Standard & Poor’s 500 index was down 1.1 percent at the 4 p.m. close of trading to 1,305.14 after declining as much as 1.9 percent. Monday’s announcement marks the first time the U.S. credit outlook has been questioned since 1995 and 1996, when a dispute between then-President Bill Clinton and House Speaker Newt Gingrich led to government shutdowns. Fitch Ratings put U.S. debt on a “negative ratings watch” in November 1995 until spring 1996, and Moody’s put some U.S. government bonds on review for a possible downgrade in January 1996. “We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” S&P said Monday.
Political pressure The action puts pressure on President Obama and House Republicans to come to agreement on plans to reduce the national debt, which S&P says could rise to 84 percent of gross domestic product by 2013. “S&P’s outlook certainly adds to motivation in Washington to confront our fiscal challenges,” said Tony Fratto, who served as a White House and U.S. Treasury official under President George W. Bush. “If economic authorities here fail to put in place a credible deficit reduction plan over the next two years, the concern is justified.” Austan Goolsbee, Obama’s chief economic adviser, rejected the S&P’s negative outlook as a “political judgment” that doesn’t deserve “too much weight.” “They are saying their political judgment is that over the next two years they didn’t see a political agreement” to reduce long-term deficits, Goolsbee, chairman of the Council of Economic Advis-
Monica Almeida / New York Times News Service
Chris DeWolfe, a co-founder of Myspace, is now running MindJolt, an ambitious upstart gaming company that has become profitable. revenue of $856 million. Since then, Myspace has tumbled spectacularly. After losing the social media crown to Facebook in late 2009, Myspace hemorrhaged users and cash, prompting its parent company to cut its staff and, finally, put it up for sale this year.
Ambitious underdog Although the capricious nature of the social Web led to the rapid descent of Myspace, its founders hope the same fluidity will work in their favor. MindJolt is an underdog in a multibilliondollar online gaming market dominated by names like Zynga, the creator of Farmville, and Electronic Arts. With its latest acquisitions, MindJolt is building its user network and breaking into the increasingly lucrative mobile entertainment market. Hallpass Media, a gaming portal, will add 4 million monthly users and about 1,500 Web-based games to MindJolt’s portfolio. Its other purchase, Social Gaming Network, a creator of several popular iPhone and Android games (with 30 million downloads), will give MindJolt an edge in mobile devices. The deals will also push the gaming portal into the business of creating its own games, making it a closer competitor to larger, hitdriven studios like Zynga. As young gaming companies
ers, told Bloomberg Television. “I don’t think that the S&P’s political judgment is right.” Obama has proposed cutting $4 trillion in cumulative deficits within 12 years through a combination of spending cuts and tax increases. The administration is resisting Republican calls for swifter cuts, while also pushing for a set of rules to enforce spending reductions over time. Goolsbee said Obama and Republican congressional leaders are “pretty close” in the deficit reduction targets they have announced. Each has set a $4 trillion target, though House Republicans have a time line of 10 years and the White House proposal would cumulatively cut that amount over 12 years. House Majority Leader Eric Cantor called the S&P warning “a wake-up call for those in Washington asking Congress to blindly increase the debt limit.” S&P’s negative outlook “makes clear that the debt-limit increase proposed by the Obama administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt,” the Virginia Republican said in a statement. S&P said it wasn’t taking a stand on the right mix of spending and revenue measures, saying only that any agreement must win the acceptance of a “cross section of leaders in both political parties” to be credible.
Confidence overseas Sovereign credit quality has gained prominence as European countries from Greece to Portugal struggle to finance their debt. The Group of 20 nations named the U.S. as one of seven large economies that will face deeper scrutiny so their politics don’t derail a global expansion. Overseas investors hold about half of the roughly $9 trillion in outstanding marketable U.S. debt, including $1.2 trillion held by China. Treasury Secretary Timothy Geithner has said the United States shouldn’t be borrowing “from the Chinese” and other foreign investors to finance tax cuts for the wealthiest Americans.
like MindJolt rush into the market, some analysts say, it will be difficult for them to compete with well-capitalized giants. Despite the challenges, DeWolfe is taking a lesson from his experience at Myspace as he moves forward with MindJolt. In a recent telephone interview, DeWolfe and Colin Digiaro, the chief operating officer and a fellow Myspace founder, were quick to offer a list of Myspace errors, including the early focus on revenue and undisciplined expansion. Since taking the reins at MindJolt, the team has invested heavily in an analytical technology that can measure users’ reactions to ad placements. But DeWolfe says perhaps his greatest insight comes from selling Myspace to News Corp. in 2005, just two years after Myspace began — and all the distractions that came with being part of a public company. “Facebook didn’t have an arm tied behind their back. They didn’t have the same pressure,” he said. “Myspace prioritized revenue and profits over user experience.” That is not to say he wouldn’t consider selling MindJolt at some point. “We’re are in no hurry with this one. We really want to get it right,” DeWolfe said. However, “If there was a right time and right price down the road — definitely down the road — we would look at it.”
Maintaining investor confidence overseas will be a question of political credibility rather than solvency for the United States, said Lena Komileva, global head of G10 strategy at Brown Brothers Harriman & Co in London. “In the relative universe of sovereign credits, investors are likely to view that the current episode of U.S. actions lagging behind market expectations as transitory which will keep U.S. risk premia contained,” Komileva said. “The euro remains the epicenter of global systemic risk.” S&P didn’t mention the $14.29 trillion debt ceiling among the risks affecting the U.S. outlook, and it noted that the U.S. has “unique external flexibility” because the dollar is the world’s most-used currency. The ratings company focused on the political calendar, saying that if current budget negotiations fail, it might not be possible to get an agreement until at least the 2014 budget cycle. The Treasury Department has said the borrowing limit will be reached no later than May 16, when it will turn to emergency measures that provide borrowing room through about July 8. Republican leaders in Congress have said they won’t back increasing the debt ceiling unless Obama agrees to more specific steps to trim the budget deficit, estimated to top $1.6 trillion this year.
S&P’s credibility Alan Krueger, the Treasury’s former chief economist and an economics professor at Princeton University in New Jersey, said the record of S&P during the financial crisis has watered down the impact of its pronouncements on the safety of U.S. debt. “The surprise to me is that the markets paid as much attention to S&P as they have,” Krueger said. “S&P has no private information, and their track record and judgment have been dismal.” S&P was too influenced by Wall Street, had insufficient resources and used outdated models to grade mortgage securities that blew up when the U.S. housing market collapsed in 2007, the Senate Permanent Subcommittee on Investigations said in an April 1010 report.
Q&A Co n tinued from D1 Why would a downgrade affect borrowing costs in the economy? The ratings issued by S&P and its main competitors — Moody’s Investors Service and Fitch Ratings — are used by investors to calculate what sort of return they should demand in exchange for the default risk they assume when investing in a given security. A lower rating means a higher chance of default. The issuer, in this case the U.S. government, would have to pay a higher interest rate to investors to market its lowerrated bonds. Since the government must borrow to pay off existing debt, the cost of that would snowball into an even more costly fix for our fiscal problems.
How would that affect me?
Mortgage interest rates are often pegged to prevailing rates for U.S. government securities, as are other borrowing rates. If your 401(k) retirement plan invests in bonds, you might get returns from rising bond rates. This was reflected in the marketplace on Monday as the interest rate on bonds crept up and stocks lost value. But rising borrowing rates choke off economic growth. If there’s no political compromise in Washington on taming future deficits, that would be bad for the U.S. economy. And if there is a compromise, it is likely to entail austerity measures that slow economic growth.
But lawmakers will reach agreement eventually, won’t they? The two political parties are very far apart. Their differences are rooted in deep
federal regulators last week, said Allison Schoenthal, a lawyer at Hogan Lovells in New York. “Principal reductions I don’t think are going to be agreed to by banks, and I don’t think the banks see a need for a penalty when, in their view, they haven’t done anything wrong,” said Schoenthal, who represents lenders and servicers and isn’t involved in the talks. Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who leads the negotiations for the states, declined to comment. Dan Frahm, a spokesman for Charlotte, N.C.based Bank of America, and Thomas Kelly, a spokesman for New York-based JPMorgan, didn’t respond to e-mails seeking comment. The 50 states, along with federal agencies including the Justice Department, seek to set requirements for how banks service loans and conduct home foreclosures. Last month, the states submitted proposed settlement terms to five mortgage servicers, and have been meeting with bank officials to reach a final settlement. The proposal
called in part for monetary payments by banks to go toward a loan modification program that would reduce loan principals for homeowners. In a speech to a group of attorneys general earlier this month, Bank of America Chief Executive Officer Brian Moynihan said “broad-based” principal reductions aren’t “a sound policy decision for America.” “Fairness is a major concern,” he said, according to the prepared text of the speech. “It’s hard to see how we could justify reducing principal for many delinquent customers who represent a small portion of borrowers, but not for the vast majority of our customers who have stayed current on their loans.” Any agreement on principal reductions will depend on the size of the writedowns, the incentives for the servicers built into the settlement and other details, which continue to be sorted out, said the person close to the negotiations. Miller said last month after a meeting between banks and state and federal officials that the two sides had “a long way to go” to reach an agreement.
philosophical disputes over the role of government in society. It’s quite possible there will be no significant deal on resolving federal finances until after the 2012 elections, and then only if one side gains significant strength. S&P analysts pointed to ongoing fiscal austerity efforts in France and Great Britain and questioned the lack of similar government financial discipline in the United States. “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address mediumand long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ ” nations, S&P analysts wrote Monday.
Was the S&P action totally a surprise? No. In February, PIMCO, the world’s largest bond investment fund, announced it was selling off its U.S. government debt because it didn’t think the return on investment properly reflected the risks of holding U.S. debt. Earlier this month, PIMCO began actually betting against U.S. debt. In a sense, big players in the bond market got ahead of the ratings agencies, which they depend on for guidance. S&P “should have made this move a long time ago,” said Steven Ricchiuto, the chief economist for Mizuho Securities USA in New York. “Let’s be honest. Ireland, Portugal, the (debt) issues of Spain are nothing more than a warm-up for what’s in play here. ... If something doesn’t happen, it’s going to be ‘how many warnings do you have to send somebody before they pay attention?’ ”
How big are our deficits and debt?
The nation’s debt held by the public on Monday totaled $9.67 trillion, while the debt the federal government owes itself stands about $4.6 trillion. The total public debt outstanding stood at $14.3 trillion. The deficit — the shortfall between what government collects in revenues and what it spends in a given year — is projected to come in around $1.6 trillion for the current fiscal year, which ends on Sept. 30.
What are the prospects for a budget deal? The first real indication may come next month, when the U.S. likely will reach its current $14.3 trillion debt limit. Congress must raise the legal limit on how much the U.S. can borrow, and unless it does so, the U.S. won’t be able to pay its creditors. That would sow financial chaos worldwide, as U.S. bonds are globally regarded as one of the world’s safest investments.
Why does this matter to the broader debt debate? Republicans, pushed by conservative tea party activists, oppose a “clean” bill that does nothing more than raise the debt ceiling. They hope to extract from Democrats and the Obama administration deeper spending cuts and progress on a long-term deficit-reduction plan as their price for going along with raising the government’s debt limit. Most Democrats oppose the GOP’s approach. “There is bipartisan opposition in the Senate to raising the debt ceiling unless we do something significant about the debt,” said Senate Republican leader Mitch McConnell, R-Ky. “And in terms of what is significant, in my view, the definition of significant is what we do is viewed as credible by the markets, by the American people, and by foreign countries.”